UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20142017
OR
¨☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 1-8944
CLIFFS NATURAL RESOURCESCLEVELAND-CLIFFS INC.
(Exact Name of Registrant as Specified in Its Charter)
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| Ohio | | 34-1464672 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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| 200 Public Square, Suite 3300, Cleveland, Ohio | | 44114-2315 |
| (Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (216) 694-5700
Securities registered pursuant to Section 12(b) of the Act:
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| | |
| Title of Each Class | | Name of Each Exchange on Which Registered |
| Common Shares, par value $0.125 per share | | New York Stock Exchange |
Depositary Shares, each representing a 1/40th ownership interest in a share of 7.00% Series A Mandatory Convertible Preferred Stock, Class A | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ý☒ NO ¨☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨☐ NO ý☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý☒ NO ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý☒ NO ¨☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý☒ Accelerated filer ¨☐ Non-accelerated filer ¨☐Smaller reporting company¨☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨☐ NO ý☒
As of June 30, 2014,2017, the aggregate market value of the voting and non-voting common shares held by non-affiliates of the registrant, based on the closing price of $15.05$6.92 per share as reported on the New York Stock Exchange — Composite Index, was $2,397,182,297$2,039,925,087 (excluded from this figure is the voting stock beneficially owned by the registrant’s officers and directors).
The number of shares outstanding of the registrant’s common shares, par value $0.125 per share, was 153,279,552297,400,968 as of February 23, 201512, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for its 20152018 annual meeting of shareholders are incorporated by reference into Part III.
| TABLE OF CONTENTS |
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| | | | Page Number |
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| DEFINITIONS | | | |
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| PART I | | | |
| | Item 1. | Business | | | |
| | | Executive Officers of the Registrant | | | |
| | Item 1A. | Risk Factors | | | |
| | Item 1B. | Unresolved Staff Comments | | | |
| | Item 2. | Properties | | | |
| | Item 3. | Legal Proceedings | | | |
| | Item 4. | Mine Safety Disclosures | | | |
| | | | | | |
| PART II | | | |
| | Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | | | |
| | Item 6. | Selected Financial Data | | | |
| | Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | | | |
| | Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | | | |
| | Item 8. | Financial Statements and Supplementary Data | | | |
| | Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | | | |
| | Item 9A. | Controls and Procedures | | | |
| | Item 9B. | Other Information | | | |
| | | | |
| PART III | | | |
| | Item 10. | Directors, Executive Officers and Corporate Governance | | | |
| | Item 11. | Executive Compensation | | | |
| | Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | | |
| | Item 13. | Certain Relationships and Related Transactions, and Director Independence | | | |
| | Item 14. | Principal Accountant Fees and Services | | | |
| | | | | | |
| PART IV | | | |
| | Item 15. | Exhibits and Financial Statement Schedules | | | |
| Item 16. | Form 10-K Summary | | | |
| | | | |
| SIGNATURES | | | |
DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our” and “Cliffs” are to Cliffs Natural ResourcesCleveland-Cliffs Inc. and subsidiaries, collectively. References to “A$” or “AUD” refer to Australian currency, “C$” to Canadian currency and “$” to United States currency.
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| Abbreviation or acronym | | Term |
AmapáABL Facility | | Anglo Ferrous Amapá Mineração Ltda.Syndicated Facility Agreement by and Anglo Ferrous Logística Amapá Ltda.among Bank of America, N.A., as Administrative Agent and Australian Security Trustee, the Lenders that are parties hereto, Cleveland-Cliffs Inc., as Parent and a Borrower, and the Subsidiaries of Parent party hereto, as Borrowers dated as of March 30, 2015, as amended |
| Adjusted EBITDA | | EBITDA excluding certain items such as extinguishment/restructuring of debt, impacts of discontinued operations, foreign currency exchange remeasurement, severance and contractor termination costs, certain supplies inventory write-offs, impairment of other long-lived assets and intersegment corporate allocations of SG&A costs |
| AG | | Autogenous Grinding |
AngloAK Steel | | Anglo American plcAK Steel Corporation (including its facilities in Ashland, Ohio, Middletown, Ohio and Dearborn, Michigan) |
| Algoma | | Essar Steel Algoma Inc. |
| Amended 2015 Equity Plan | | Cliffs Natural Resources Inc. Amended and Restated 2015 Equity and Incentive Compensation Plan
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| APBO | | Accumulated Postretirement Benefit Obligation |
| ArcelorMittal | | ArcelorMittal (as the parent company of ArcelorMittal Mines Canada, ArcelorMittal USA and ArcelorMittal Dofasco GP, as well as, many other subsidiaries) |
| ArcelorMittal USA | | ArcelorMittal USA LLC (including many of its North AmericanUnited States affiliates, subsidiaries and representatives. References to ArcelorMittal USA comprise all such relationships unless a specific ArcelorMittal USA entity is referenced) |
| ALJ | | Administrative Law Judge |
| AMT | | Alternative Minimum Tax |
| ASC | | Accounting Standards Codification |
BarrickASU | | Barrick Gold Corporation Inc. |
BART | | Best Available Retrofit TechnologyAccounting Standards Updates |
| Bloom Lake | | The Bloom Lake Iron Ore Mine Limited Partnership |
| Bloom Lake Group | | Bloom Lake General Partner Limited and certain of its affiliates, including Cliffs Quebec Iron Mining ULC |
| BNSF | | Burlington Northern Santa Fe, LLC |
| Canadian Entities | | Bloom Lake Group, Wabush Group and certain other wholly-owned subsidiaries |
| CCAA | | Companies' Creditors Arrangement Act (Canada) |
| CERCLA | | Comprehensive Environmental Response, Compensation and Liability Act of 1980 |
| CFR | | Cost and freight |
Chromite Project | | Cliffs Chromite Ontario Inc. |
CIRB | | Canadian Industrial Relations Board |
| CLCC | | Cliffs Logan County Coal LLC |
| Clean Water Act | | Federal Water Pollution Control Act |
Cliffs Chromite Far North Inc. | | Entity previously known as Spider Resources Inc. |
Cliffs Chromite Ontario Inc. | | Entity previously known as Freewest |
| CN | | Canadian National Railway Company |
Cockatoo IslandCO2 | | Cockatoo Island Joint VentureCarbon Dioxide |
CODMCodification | | Chief Operating Decision MakerFASB Accounting Standards Codification |
| Compensation Committee | | Compensation and Organization Committee of Cliffs' Board of Directors |
Consent OrderCPP | | Administrative Order by Consent |
Consolidated Thompson | | Consolidated Thompson Iron Mining Limited (now known as Cliffs Québec Iron Mining ULC) |
CQIM | | Cliffs Québec Iron Mining ULC (formerly known as Cliffs Québec Iron Mining Limited) |
Cr2O3
| | Chromium Oxide |
CSAPR | | Cross-State Air Pollution Rule |
DD&A | | Depreciation, depletion and amortization |
DEP | | U.S. Department of Environment ProtectionClean Power Plan |
| Directors’ Plan | | Cliffs Natural Resources Inc. Amended and Restated 2014 Nonemployee Directors’ Compensation Plan |
| Dodd-Frank Act | | Dodd-Frank Wall Street Reform and Consumer Protection Act |
DofascoDR-grade pellets | | ArcelorMittal Dofasco Inc.Direct Reduction pellets |
| EAF | | Electric Arc Furnace |
| EBITDA | | Earnings before interest, taxes, depreciation and amortization |
| Empire | | Empire Iron Mining Partnership |
| EPA | | U.S. Environmental Protection Agency |
| EPS | | Earnings per share |
EPSL | | Esperance Port Sea and Land |
| ERM | | Enterprise Risk Management |
Essar | | Essar Steel Algoma Inc. |
Essar Sale Agreement | | 2002 Pellet Sale and Purchase Agreement as amended |
| Exchange Act | | Securities Exchange Act of 1934, as amended |
| FASB | | Financial Accounting Standards Board |
| Fe | | Iron |
(Fe,Mg) (Cr,Al,Fe)2O4FERC | | Mineral ChromiteFederal Energy Regulatory Commission |
| FeT | | Total Iron |
| FIP | | Federal Implementation Plan |
| FMSH Act | | U.S. Federal Mine Safety and Health Act 1977, as amended |
| GAAP | | Accounting principles generally accepted in the U.S. |
| GHG | | Greenhouse gas |
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| Abbreviation or acronym | | Term |
FreewestHBI | | Freewest Resources Canada Inc. (now known as Cliffs Chromite Ontario Inc.) |
GAAP | | Accounting principles generally accepted in the United States |
GHG | | Greenhouse gasHot Briquetted Iron |
| Hibbing | | Hibbing Taconite Company, |
ICE Plan | | Amended and Restated Cliffs 2007 Incentive Equity Plan, as amended |
INR | | INR Energy, LLC |
IRS | | U.S. Internal Revenue Service |
Ispat | | Ispat Inland Steel Company an unincorporated joint venture |
| Koolyanobbing | | Collective term for the operating deposits at Koolyanobbing, Mount Jackson and Windarling |
LCM | | Lower of cost or market |
| LIBOR | | London Interbank Offered Rate |
| LIFO | | Last-in, first-out |
| Long ton | | 2,240 pounds |
| LS&I | | Lake Superior & Ishpeming Railroad Company |
| LTVSMC | | LTV Steel Mining Company |
MDEQMetric ton | | Michigan Department of Environmental Quality2,205 pounds |
| MISO | | Midcontinent Independent System Operator, Inc. |
| MMBtu | | Million British Thermal Units |
Moody's | | Moody's Investors Service, Inc., a subsidiary of Moody's Corporation, and its successors |
| MPCA | | Minnesota Pollution Control Agency |
MPI | | Management Performance Incentive Plan |
| MPSC | | Michigan Public Service Commission |
MPUCMonitor | | Minnesota Public Utilities Commission |
MRPS | | Mandatory redeemable preference shares |
MRRT | | Minerals Resource Rent Tax (Australia) |
MSHA | | U.S. Mine Safety and Health Administration |
MWh | | Megawatts per hour |
n/m | | Not meaningfulFTI Consulting Canada Inc. |
| NAAQS | | National Ambient Air Quality Standards |
NBCWANet ton | | National Bituminous Coal Wage Agreement |
NDEP | | Nevada Department of Environmental Protection |
Ni | | Nickel2,000 pounds |
NO2 | | Nitrogen dioxide |
NOx | | Nitrogen oxide |
| Northshore | | Northshore Mining Company |
| NPDES | | National Pollutant Discharge Elimination System, authorized by the U.S. Clean Water Act |
NRD | | Natural Resource Damages |
NSPS | | New Source Performance Standards |
| NYSE | | New York Stock Exchange |
| Oak Grove | | Oak Grove Resources, LLC |
OCI | | Other comprehensive income (loss) |
| OPEB | | Other postretirement employment benefits |
| OPEB cap | | Medical premium maximums |
P&P | | Proven and Probable |
| PBO | | Projected benefit obligation |
| Pinnacle | | Pinnacle Mining Company, LLC |
Pluton ResourcesPlatts 62% Price | | Pluton Resources LimitedPlatts IODEX 62% Fe Fines Spot Price |
Reconciliation ActPreferred Share | | Health Care and Education Reconciliation Act |
Ring of Fire properties | | Black Thor, Black Label and Big Daddy chromite deposits in Ontario, Canada7.00% Series A Mandatory Convertible Preferred Stock, Class A, without par value |
| ROA | | Return on asset |
RTWG | | Rio Tinto Working Group |
| S&P | | Standard & Poor's Rating Services, a division of Standard & Poor's Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc., and its successors |
SARs | | Stock Appreciation Rights |
| SEC | | U.S. Securities and Exchange Commission |
SeverstalSG&A | | Severstal Dearborn,Selling, general and administrative |
| Seneca | | Seneca Coal Resources, LLC |
| Silver Bay Power | | Silver Bay Power Company |
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| | |
Abbreviation or acronym | | Term |
| SIP | | State Implementation Plan |
SMCRA | | Surface Mining Control and Reclamation Act |
SO2SO2 | | Sulfur dioxide |
SonomaSSR | | Sonoma Coal Project |
Spider | | Spider Resources Inc. (now known as Cliffs Chromite Far North Inc.)System Support Resource |
| STRIPS | | Separate Trading of Registered Interest and Principal of Securities |
Substitute Rating Agency | | A "nationally recognized statistical rating organization" within the meaning of Section 3 (a)(62) of the Exchange Act, selected by us (as certified by a certificate of officers confirming the decision of our Board of Directors) as a replacement agency of Moody's or S&P, or both of them, as the case may be |
| Tilden | | Tilden Mining Company L.C. |
| TMDL | | Total Maximum Daily Load |
TRIR | | Total Reportable Incident Rate |
| TSR | | Total Shareholder Return |
U/G | | Underground |
UMWA | | United Mineworkers of America |
| United Taconite | | United Taconite LLC |
UP 1994 | | 1994 Uninsured Pensioner Mortality Table |
| U.S. | | United States of America |
U.S. Steel Canada | | U.S. Steel Canada Inc., a subsidiary of United States Steel Corporation and all subsidiaries |
| USW | | United Steelworkers |
Vale | | Companhia Vale do Rio Doce |
| VEBA | | Voluntary Employee Benefit Association trusts |
VNQDC Plan | | 2005 Voluntary NonQualified Deferred Compensation Plan, as amended |
| VWAP | | Volume Weighted Average Price |
| Wabush | | Wabush Mines Joint Venture |
WeirtonWabush Group | | ArcelorMittal WeirtonWabush Iron Co. Limited and Wabush Resources Inc. |
WISCO | | Wugang Canada, and certain of their affiliates, including Wabush Mines (an unincorporated joint venture of Wabush Iron Co. Limited and Wabush Resources Investment Limited, a subsidiary of Wuhan IronInc.), Arnaud Railway Company and Steel (Group) Corporation |
Zamin | | Zamin Ferrous Ltd |
1974 PP | | The UMWA 1974 Pension Plan |
2008 Director's Plan | | Nonemployee Directors’ Compensation Plan, as amended and restated 12/31/2008Wabush Lake Railway Company |
| 2012 Equity Plan | | Cliffs Natural Resources Inc. Amended and Restated 2012 Incentive Equity Plan |
| 2015 Equity Plan | | Cliffs Natural Resources Inc. 2015 Equity and Incentive Compensation Plan |
PART I
Introduction
Cliffs Natural ResourcesFounded in 1847, Cleveland-Cliffs Inc. traces its history back to 1847. Today, we are a leadingis the largest and oldest independent iron ore mining and natural resources company.company in the United States. We are a major supplier of iron ore pellets to the North American steel industry from our mines and pellet plants located in Michigan and Minnesota. Cliffs also produces low-volatile metallurgical coal in the U.S. from its mines located in Alabama and West Virginia. Additionally, Cliffs operateswe operate an iron ore mining complex in Western Australia and owns two non-operating iron ore minesAustralia. By 2020, we expect to be the sole producer of HBI in Eastern Canada.the Great Lakes region with the development of our first production plant in Toledo, Ohio. Driven by the core values of safety, social, environmental and capital stewardship, our employees endeavor to provide all stakeholders with operating and financial transparency.
We are organized through a global commercial group responsible for sales and delivery of our products and operations groups responsible for the production of the mineralsiron ore that we market. Our continuing operations are organized according to product category and geographic location: U.S. Iron Ore and Asia Pacific Iron Ore, North American Coal and Eastern Canadian Iron Ore.
In the U.S., we currently operate fiveown or co-own four operational iron ore mines plus one indefinitely idled mine. We are currently operating one iron ore mine in Michigan and three iron ore mines in Michigan and Minnesota and two metallurgical coal operationsMinnesota. All four mines are currently operating at or near full capacity. The Empire mine located in Alabama and West Virginia.Michigan was indefinitely idled beginning in August 2016. Our Asia Pacific operations consist solely of our Koolyanobbing iron ore mining complex in Western Australia. We also own twoKoolyanobbing is currently operating at a level appropriate for the current price discounting environment for low-grade iron ore mines in Eastern Canada, althoughproducts containing less than 62% Fe, and we have currently shutdown one of the mines dueexpect mining operations to its unsustainable high cost structure and the other mine has ceased all production and transitioned to "care-and-maintenance" mode.cease during 2018.
Re-focusing the CompanyWe are Focused on Protecting our Core U.S. Iron Ore Business
Our leadership changed over the past year. Subsequent to our 2014 Annual Meeting of Shareholders, where shareholders elected six new directors to our Board of Directors, including our new Chairman, President and Chief Executive Officer, Lourenco Goncalves, our Board changed substantially. The reconstituted Board of Directors has established a strategy to return the Company to its core strengths.
We have shifted from a diversification based strategy to one that focuses on strengthening our U.S. Iron Ore operations. We are the market-leading iron ore producer in the U.S., supplying differentiated iron ore pellets under long-term contracts someto major North American blast furnace steel producers. We have the unique advantage of which begin to expirebeing a low-cost, high-quality producer of iron ore pellets in the end of 2016,Great Lakes market with significant transportation and logistics advantages to serve the largest U.S.Great Lakes steel producers. Pricing protectionsmarket effectively. The pricing structure and long-term supply, certainty provided bynature of our existing contracts, andalong with our low-cost operating profile, positionsposition U.S. Iron Ore as a strong cash flow generator in most commodity pricing environments. Since instituting our most stablestrategy in 2014 of focusing on this core business, we have achieved significant accomplishments, including providing volume certainty by signing a ten-year supply agreement with our largest customer; substantially reducing operating costs by making operational improvements; and profitable business. developing new pellet products to meet ever-evolving market demands.
We expect to continue to strengthenrecognize the importance of our strength in the U.S. Iron Ore cost operating profile throughbusiness, and our operational expertisetop strategic priority is to protect and disciplined capital allocation policies.enhance our market position. This involves continuing to deliver high-quality, custom-made pellets that allow our customers to remain competitive in the quality, production efficiency, and environmental friendliness of their steel products. Protecting the core business also involves continually evaluating opportunities to expand both our production capacity and ore reserve life. In 2017, we achieved key accomplishments toward these goals by acquiring the remaining minority stake in our Tilden and Empire mines as well as additional real estate interests in Minnesota.
Expanding our Customer Base
Eastern Canadian Iron Ore
The Cliffs' Wabush Scully mineWhile we hold a strong market position in Newfoundland and Labrador was idled bysupplying iron ore to Great Lakes blast furnaces, we cannot ignore the endongoing shift of steelmaking share in the U.S. away from our core blast furnace customers to EAF steelmakers. Over the past 25 years, the market share of EAFs has nearly doubled. However, as EAFs have moved to higher value steel products, they require more high-quality iron ore-based metallics instead of scrap as raw material feedstock. As a result of this trend, one of our top strategic priorities is to become a critical supplier of the first quarter of 2014 and subsequently began to commence permanent closure in the fourth quarter of 2014. With costs unsustainably high, it was not economically viable to continue running this operation. Approximately 500 employees at both the Wabush Scully mine and the Pointe Noire rail and port operation in Québec were impactedEAF market by providing these actions.
On November 19, 2014,specialized metallics. In June 2017, we announced the pursuitplanned construction of an exit optionHBI production plant in Toledo, Ohio. HBI is a specialized high-quality iron alternative to scrap that, when used as a feedstock, allows the EAF to produce more valuable grades of steel. We expect our HBI to partially replace the over 3 million metric tons of ore-based metallics that are imported into the Great Lakes every year from Russia, Ukraine, Brazil and Venezuela.
Our Toledo plant is expected to produce HBI at a rate of 1.6 million metric tons per year when brought to production in 2020. We expect that this will create additional demand for our Eastern Canadian Iron Ore operations. WithDR-grade pellets of 2.5 million long tons. Not only does this production plant create another outlet for our high-margin pellets, but it also presents an attractive economic opportunity for us. As the expansion no longer viable and the Bloom Lake operation remaining unprofitable, we have shifted our focus to executing an exit option for Eastern Canadian Iron Ore operations that minimizes the cash outflows and associated liabilities.
During the fourth quarteronly producer of 2014, we disclosed that, despite our cost-cutting progress at our Bloom Lake mine, we concluded that Phase I alone was not economically feasible based on our current operating plans. For the Bloom Lake mine to be profitable, we concluded that Phase II of the Bloom Lake mine must be developed to reduce the overall cash cost of operations. We could only develop Phase II of the Bloom Lake mine if we had been able to secure new equity partners to shareDR-grade pellets in the capital costs, whichGreat Lakes and with access to abundant, low-cost natural gas, we estimatedwill be in a unique position to be approximately $1.2 billion. As the equity partners were unable to commit within the short timeframe we required, we determined that the Phase II expansion of the Bloom Lake mine was no longer a viable option for us and we shifted our focus to considering available possibilities and executing an exit option for Eastern Canadian Iron Ore operations that minimized the cash outflows and associated liabilities. In December 2014, iron ore production at the Bloom Lake mine was suspended and the Bloom Lake mine was placed in ‘‘care-and-maintenance’’ mode.
On January 27, 2015, we announced that Bloom Lake General Partner Limited and certain of its affiliates, including Cliffs Québec Iron Mining ULC (collectively, the "Bloom Lake Group") commenced restructuring proceedings in Montreal, Québec, under the CCAA. The Bloom Lake Group had recently suspended operations, and for several months we were exploring options to sell certain of our Canadian assets, among other initiatives. The decision to seek protection under the CCAA was based on a thorough legal and financial analysis of the options available to the Bloom Lake Group. The Bloom Lake Group was no longer generating any revenues and was not able to meet its obligations as they came due. The initial CCAA order addressed the Bloom Lake Group's immediate liquidity issues and permits the Bloom Lake Group to preserve and protect its assets for the benefit of all stakeholders while restructuring and sale options are explored. As part of the CCAA process, the Court has appointed FTI Consulting Canada Inc. as the Monitor. The Monitor's roleserve clients in the CCAA processregion. In addition, the Toledo site is in close proximity to monitor the activities of the Bloom Lake Group and provide assistance to the Bloom Lake Group and its stakeholders in respect of the CCAA process.over 20 EAFs, giving us a natural competitive freight advantage over import competitors.
Business Segments
Our Company’s continuing operations are organized and managed according to product category and geographic location: U.S. Iron Ore and Asia Pacific Iron Ore, North American Coal and Eastern Canadian Iron Ore. Amapá, which was sold in the fourth quarter of 2013, previously was reported through our Latin American Iron Ore operating segment, which did not meet the criteria for a reportable segment. Additionally, Sonoma, which was sold in the fourth quarter of 2012, previously was reported through our Asia Pacific Coal operating segment, which did not meet the criteria for a reportable segment.
Segment information reflects our strategic business units, which are organized to meet customer requirements and global competition. We have historically evaluated segment performance based on sales margin, defined as revenues less cost of goods sold, and operating expenses identifiable to each segment. Additionally, beginning in the third quarter of 2014, concurrent with the change of a majority of our Board of Directors and appointment of our new Chairman, President and Chief Executive Officer in August 2014, management began to evaluate segment performance based on EBITDA, defined as Net Income (Loss)before interest, income taxes, depreciation, depletion and amortization, and Adjusted EBITDA, defined as EBITDA excluding certain items such as impairment charges, impacts of permanently idled, closed or sold facilities, foreign currency remeasurement, severance and other costs associated with the change in control, litigation judgments and intersegment corporate allocations of SG&A costs. Management uses and believes that investors benefit from referring to these measures in evaluating operating and financial results, as well as in planning, forecasting and analyzing future periods as these financial measures approximate the cash flows associated with the operational earnings. Financial information about our segments, including financial information about geographic areas, is included inItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and NOTE 2 - SEGMENT REPORTING included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.REPORTING.
U.S. Iron Ore
We are a major globalproducer of iron ore producer,pellets, primarily selling production from U.S. Iron Ore to integrated steel companies in the U.S. and Canada. We manage and operate fivefour iron ore mines locatedmines: the Tilden mine in Michigan and the Northshore, United Taconite and Hibbing mines in Minnesota. The U.S.-based mines currently have an annual rated capacity of 32.927.4 million long tons of iron ore pellet production, representing 56 percent55% of total U.S. pellet production capacity. Based on our equity ownership in these mines, our share of the annual rated production capacity is currently 25.521.2 million long tons, representing 44 percent42% of total U.S. annual pellet capacity.
The following chart summarizes the estimated annual pellet production capacity and percentage of total U.S. pellet production capacity for each of the respective iron ore producers as of December 31, 2014:2017:
| | U.S. Iron Ore Pellet | Annual Rated Capacity Tonnage | | | | Current Estimated Capacity (Tons in Millions)1 | | Percent of Total U.S. Capacity | | Current Estimated Capacity (Long Tons in Millions)1 | | Percent of Total U.S. Capacity |
| All Cliffs’ managed mines | | 32.9 |
| | 56.3 | % | | 27.4 |
| | 54.9 | % |
| Other U.S. mines | | | | | | | | |
| U.S. Steel’s Minnesota ore operations | | | | | | | | |
| Minnesota Taconite | | 14.3 |
| | 24.6 |
| | 14.3 |
| | 28.7 |
|
| Keewatin Taconite | | 5.4 |
| | 9.2 |
| | 5.4 |
| | 10.8 |
|
| Total U.S. Steel | | 19.7 |
| | 33.8 |
| | 19.7 |
| | 39.5 |
|
| ArcelorMittal USA Minorca mine | | 2.8 |
| | 4.8 |
| | 2.8 |
| | 5.6 |
|
| Magnetation | | 3.0 |
| | 5.1 |
| |
| Total other U.S. mines | | 25.5 |
| | 43.7 |
| | 22.5 |
| | 45.1 |
|
| Total U.S. mines | | 58.4 |
| | 100.0 | % | | 49.9 |
| | 100.0 | % |
| | | | | | | | | |
1 Tons are long tons (2,240 pounds) | | | | | |
1 Empire mine was excluded from the estimated capacity calculation as it is indefinitely idled. | | 1 Empire mine was excluded from the estimated capacity calculation as it is indefinitely idled. |
Our U.S. iron oreIron Ore production generally is sold pursuant to long-term supply agreements with various price adjustment provisions. For the year ended December 31, 2014,2017, we produced a total of 29.725.5 million long tons of iron ore pellets, including 22.4pellets. The 2017 U.S. Iron Ore production included 18.8 million long tons for our account and 7.36.7 million long tons on behalf of current and previous steel company partners of the mines. During 2016 and 2015, we produced a total of 23.4 million and 26.1 million long tons, respectively.
We produce various grades of iron ore pellets, including standard, fluxed and fluxed,DR-grade, for use in our customers’ blast furnacesoperations as part of the steelmaking process. The variation in grades of iron ore pellets results from the specific chemical and metallurgical properties of the ores at each mine, the requirements of end user's steelmaking process and whether or not fluxstone is added in the process. Although the grade or grades of pellets currently delivered to each customer are based on that customer’s preferences, which depend in part on the characteristics of the customer’s blast furnacesteelmaking operation, in manycertain cases our iron ore pellets can be used interchangeably. Industry demand for the various grades of iron ore pellets depends on each customer’s preferences and changes from time to time. In the event that a given mine is operating at full capacity, the terms of most of our pellet supply agreements allow some flexibility in providing our customers iron ore pellets from different mines.
Standard pellets require less processing, are generally the least costly pellets to produce and are called “standard” because no ground fluxstone, such as limestone or dolomite, is added to the iron ore concentrate before turning the concentrate into pellets. In the case of fluxed pellets, fluxstone is added to the concentrate, which produces pellets that can perform at higher productivity levels in the customer’s specific blast furnace and will minimize the amount of fluxstone the customer may be required
to add to the blast furnace. DR-grade pellets require additional processing to make a pellet that contains higher iron and lower silica content than a standard pellet. Unlike standard or fluxed pellets, DR-grade pellets are fed into a direct reduced iron facility, which then are converted into DRI or HBI, a high-quality raw material used to feed an EAF.
Additionally, as the EAF steel market continues to grow in the U.S., there is an opportunity for our iron ore to serve this market by providing pellets to the alternative metallics market to produceDRI, HBI and/orpig iron. In 2016 and 2017, we produced and shipped industrial trials of low-silica DR-grade pellets, which were successfully processed in two customers' DRI reactors to produce a high-quality DRI product. By 2020, we expect to sell these low-silica DR-grade pellets to our own HBI facility in Toledo, Ohio.
Each of our U.S. Iron Ore mines is located near the Great Lakes. The majority of our iron ore pellets are transported via railroads to loading ports for shipment via vessel to blast furnace steelmakers in North America.
Our U.S. Iron Ore sales are influenced by seasonal factors in the first quarterhalf of the year as shipments and sales are restricted by the Army Corp of Engineers due to closure of the Soo Locks and the Welland Canal on the Great Lakes.Lakes because of winter weather. During the first quarter, we continue to produce our products, but we cannot ship most of those products via lake vessel until the conditions on the Great Lakes are navigable, which causes our first and second quarter inventory levels to rise. Our limited practice of shipping product to ports on the lower Great Lakes or to customers’ facilities prior to the transfer of title has somewhat mitigated the seasonal effect on first and second quarter inventories and sales under our current accounting policies, as shipment from this point to the customers’ operations is not limited by weather-related shipping constraints. At December 31, 20142017 and 2013,2016, we had approximately 1.41.5 million and 1.2 millionlong tons of pellets respectively, in inventory atin the lower lakesGreat Lakes or at customers’ facilities.
TableUpon adoption of ContentsASC 606 on January 1, 2018, the timing and pattern of revenue recognition will change for our U.S. Iron Ore segment. Due to the closure of the Soo Locks and the Welland Canal during the winter months, our revenues will be lower than historical levels during the first quarter and higher than historical levels during the remaining three quarters in future years. However, the total amount of revenue recognized during the year should remain substantially the same as under current GAAP. There will not be a material change in the pattern or timing of revenue recognition for Asia Pacific Iron Ore.U.S. Iron Ore Customers
Our U.S. Iron Ore revenues primarily are derived from sales of iron ore pellets to the North American integrated steel industry, consisting primarily of three major customers. Generally, we have multi-year supply agreements with our customers. Sales volume under these agreements largely is dependent on customer requirements, and in manycertain cases, we are the sole supplier of iron ore to the customer. Historically, each agreement has contained a base price that is adjusted annually using one or more adjustment factors. Factors that could result in a price adjustment include spot pricing, measures of generalchanges in the Platts 62% Price, along with pellet premiums, published Platts international indexed freight rates and changes in specified Producer Price Indices, including those for industrial inflationcommodities, fuel and steel prices. Additionally, certain of our supply agreements have a provision that limits the amount of price increase or decrease in any given year.steel.
During 2014, 20132017, 2016 and 2012,2015, we sold 21.818.7 million, 21.318.2 million and 21.617.3 million long tons of iron ore pellets,product, respectively, from our share of the production from our U.S. Iron Ore mines. The segment’s five largest customers together accounted for a total of 95 percent, 87 percent and 91 percent of U.S. Iron Ore product revenues for the years 2014, 2013 and 2012, respectively. Effective September 16, 2014, AK Steel completed the acquisition of Severstal North America's integrated steelmaking assets located in Dearborn, Michigan. For comparative purposes, we have combined historical data of AK Steel for all periods presented. Refer to Concentration of Customers below for additional information regarding our major customers.
Asia Pacific Iron Ore
Our Asia Pacific Iron Ore operations are located in Western Australia and as of December 31, 2014, consist solely of our wholly ownedwholly-owned Koolyanobbing complex. Our 50 percent equity interest in Cockatoo Island also was included in these operations through September 2012, at which time we sold our interest.operation.
The Koolyanobbing operations serveoperation serves the Asian iron ore markets with direct-shipped fines and lump ore. The lump products are fed directly to blast furnaces, while the fines products are used as sinter feed. The variation in the two export product grades reflects the inherent chemical and physical characteristics of the ore bodies mined as well as the supply requirements of our customers. In September 2010, our Board of Directors approved a capital project at our Koolyanobbing operation, which was completed in the second quarter of 2012,During 2017, 2016 and increased production capacity at Koolyanobbing to approximately 11.02015, we produced 10.1 million, 11.8 million and 11.7 million metric tons, annually. Production in 2014 was 11.4 million metric tons, compared with 11.1 million metric tons in 2013 and 10.7 million metric tons in 2012.respectively.
Koolyanobbing is a collective term for the operatingore deposits at Koolyanobbing, Mount Jackson and Windarling. There are approximately 70 miles separating the three mining areas. Banded iron formations host the mineralization, which is predominately hematite and goethite. Each deposit is characterized with different chemical and physical attributes and, in order to achieve customer product quality, ore in varying quantities from each deposit must be blended together.
Crushing and blending are undertaken at Koolyanobbing, where the crushing and screening plant is located. Once the blended ore has been crushed and screened into a direct lump and fines shipping product, it is transported by rail approximately 360 miles south to the Port of Esperance, via Kalgoorlie, for shipment to our customers in Asia.
On July 31, 2012, we entered into a definitive asset sale agreement with our joint venture partner, HWE Cockatoo Pty Ltd., to sell our beneficial interest in the mining tenements and certain infrastructure of Cockatoo Island to Pluton Resources, which agreement was amended on August 31, 2012. On September 7, 2012, the closing date, Pluton Resources paid a nominal sum of AUD $4.00 and assumed ownership of the assets and responsibility for the environmental rehabilitation obligations and other assumed liabilities not inherently attached to the tenements acquired. The rehabilitation obligations and assumed liabilities that inherently are attached to the tenements were transferred to Pluton Resources upon registration by the Department of Mining and Petroleum denoting Pluton Resources as the tenement holder. Upon final settlement of the sale, which was completed during the second quarter of 2013, we extinguished approximately $18.6 million related to the estimated cost of the rehabilitation. As of December 31, 2013, we had no remaining rehabilitation obligations related to Cockatoo Island. Our production at Cockatoo Island continued until the completion of Stage 3 mining in September 2012. Our portion of Cockatoo's annual production of iron ore premium fines totaled 0.6 million metric tons in 2012. We had no production at Cockatoo Island in 2014 and 2013 due to the sale of our interest in Cockatoo Island during the third quarter of 2012.
Asia Pacific Iron Ore Customers
Asia Pacific Iron Ore’s production is under contract with steel companies primarily in China, Japan Korea and Taiwan. Generally,South Korea. In March 2017, we have two-year or three-year termextended the majority of our supply agreements with steel producers in China for one year. These contracts will expire in March 2018, and two-yearwe will only renew contracts if it can be done in an economically viable manner. Our supply agreement with our client in South Korea expired in December 2017. We renewed that agreement for 2018; however, it is at a lower committed quantity than our previous agreement. Our supply agreements with our customers in Japan.Japan expire in March 2018. These contracts could be renewed for additional volume. Pricing for our Asia Pacific Iron Ore Chinese customers consists of shorter-term pricing mechanisms of various durations up to one monththree months based on the average of daily spot prices that are generally associated with either unloading each shipment or the time of loading. The existing contracts are dueunloading of each shipment. Pricing with our Japanese and South Korean customers is generally similar to expire at various dates until March 2015 forthe inputs used with our Chinese and Japanese customers, whichbut the pricing inputs are customarily renewed in conjunction with our customers' fiscal year.fixed before shipment.
During 2014, 20132017, 2016 and 2012,2015, we sold 11.59.8 million, 11.011.6 million and 11.711.6 million metric tons of iron ore, respectively, from our Western Australia mines.Koolyanobbing operation. No Asia Pacific Iron Ore customer comprised more than 10 percent10% of Cliffsour consolidated sales in 2014, 20132017, 2016 or 2012. Asia Pacific Iron Ore’s five largest customers accounted for approximately 38 percent of the segment’s sales in 2014, 42 percent in 2013 and 44 percent in 2012.
North American Coal
We own and operate two low-volatile metallurgical coal operations located in Alabama and West Virginia that currently have a rated capacity of 6.5 million tons of production annually as of December 31, 2014. In 2014, we sold a total of 7.4 million tons, compared with 7.3 million tons in 2013 and 6.5 million tons in 2012.In the fourth quarter of 2014, we sold our CLCC assets, which consisted of two high-volatile metallurgical coal mines and a thermal coal mine. The sale was completed on December 31, 2014. Sales tons at the CLCC operations were 2.4 million tons, 2.2 million tons and 2.1 million tons for the years ended December 31, 2014, 2013, and 2012, respectively, and are included in the sales tons disclosed above.
Metallurgical coal generally is sold at a premium over the more prevalently mined thermal coal, which generally is utilized to generate electricity. Metallurgical coal receives this premium because of its coking characteristics, which include contraction and expansion when heated, and volatility, which refers to the loss in mass when coal is heated in the absence of air. Coals with lower volatility are valued more highly than coals with a higher volatility.
Each of our North American coal mines are positioned near rail or barge lines providing access to international shipping ports, which allows for export of our coal production.
North American Coal Customers
North American Coal’s metallurgical coal production is sold to global integrated steel and coke producers in Europe, North America, China, India and South America and its thermal coal production was sold to energy companies and distributors in North America and Europe. Approximately 56 percent of our 2014 and 70 percent of our 2013 production was committed under contracts of at least one year. Approximately 45 percent of our projected 2015 sales has been committed and priced. North American contract negotiations are largely completed, and international contract negotiations recently have begun. The remaining tonnage primarily is pending price negotiations with our international customers, which typically is dependent on settlements of Australian pricing for metallurgical coal. International customer contracts typically are negotiated on a fiscal year basis extending from April 1 through March 31, whereas customer contracts in North America typically are negotiated on a calendar year basis extending from January 1 through December 31.
International and North American sales represented 64 percent and 36 percent, respectively, of our North American Coal sales in 2014. This compares with 61 percent and 39 percent, respectively, in 2013 and 66 percent and 34 percent, respectively, in 2012.2015. The segment’s five largest customers together accounted for a total of 48 percent, 57 percent57%, 56% and 50 percent47% of North American CoalAsia Pacific Iron Ore product revenues for the years 2017, 2016 and 2015, respectively.
Discontinued Operations
Prior to late March 2014, 2013 and 2012, respectively. Refer to Concentration of Customers below for additional information regarding our major customers.
Eastern Canadian Iron Ore
We ownwe operated two iron ore mines in Eastern Canada, the Bloom Lake mine and the Wabush Scully mine.
As disclosed in the first quarter of 2014, at the end of In late March 2014, we idled our Wabush Scully mine in Newfoundland and Labrador and in November 2014, we began to implement the permanent closure plan for the mine. The idle and ultimate closure was driven by the unsustainable high costhigh-cost structure. Additionally, we disclosed in November 2014, that we were pursuing exit options for our Bloom Lake mine. As disclosed inIn January 2015, we ceased active production at the Bloom Lake mine has ceased and the mine has transitioned to "care-and-maintenance" mode. Together, the shutdown of the Wabush Scully mine and the cessation of operations at our Bloom Lake mine representrepresented a complete curtailment of our Eastern Canadian Iron Ore operations.
We had been producing a concentrate product at ourRestructuring proceedings with respect to the Bloom Lake operation and, starting inGroup were commenced under the second half of 2013 through the idleCCAA in the first quarter of 2014, we had been producing a concentrate product at our Wabush operation in Eastern Canada. The concentrate products had been marketed toward steel producers, predominately based in Asia, that have sintering capabilities at their steel-making operations. The2015. During the second quarter of 2015, the CCAA protection granted to the Bloom Lake concentrateGroup was blended with other sinter finesextended to include the Wabush Group to facilitate the reorganization of each of their businesses and materials at high temperatures, creatingoperations. As of December 31, 2017, CCAA proceedings are still ongoing. The Monitor appointed by the court in the CCAA proceedings for the Bloom Lake Group and the Wabush Group has conducted a direct charge product used in blast furnace operations.
We produced “high manganese” pellets, both in standardclaims process pursuant to which creditors have filed claims against the Bloom Lake Group and fluxed grades, through June 2013 at ourthe Wabush operation in Eastern Canada, whereGroup. The Monitor is reviewing all claims filed as part of this claims process. Currently, there is more natural manganeseuncertainty as to the amount of the distribution that will be made to the creditors of the Bloom Lake Group and the Wabush Group, including, if any, to us, and whether we could be held liable for claims that may be asserted by or on behalf of the Bloom Lake Group or the Wabush Group or by their respective representatives against non-debtor affiliates of the Bloom Lake Group and the Wabush Group. During 2017, we became aware that it was probable the Monitor will assert a preference claim against us and/or certain of our affiliates. Given that it is probable the claim will be asserted by the Monitor, we have recorded an estimated liability of $55.6 million, which includes the value of our related-party claims against the Bloom Lake Group and the Wabush Group. Should the Monitor proceed to assert the claim, we believe the Monitor will demand an amount in excess of the value of our related-party claims against the estate. Thus, it is possible that a change in the crude ore than is found at our other operations. The manganese containedestimated liability may occur in the iron ore mined atfuture. We deny liability for any amount and will vigorously defend such claim.
Financial results prior to the respective deconsolidations of the Bloom Lake and Wabush cannot be removed entirely duringGroups and subsequent expenses directly associated with the concentrating process.
ForCanadian Entities are included in our financial statements and classified within discontinued operations. Refer to NOTE 14 - DISCONTINUED OPERATIONS for further discussion of the year ended December 31, 2014, we produced a total of 6.2 million metric tons of concentrate.
Both Eastern Canadian Iron Ore mines are located nearsegment discontinued operations and the St. Lawrence Seaway. Our iron ore products had been transported via railroads to loading ports for shipment via vessel to steelmakers in North America or intostatus of the international seaborne market.CCAA proceedings.
Eastern Canadian Iron Ore Customers
Our Eastern Canadian Iron Ore revenues were derived from sales to customers in Asia, Europe and North America. We had various customers for iron ore concentrate and pellets, of which our partner in the Bloom Lake mine is considered a major customer for iron ore concentrate. Pricing for our Eastern Canadian Iron Ore customers consisted primarily of short-term pricing arrangements that were linked to spot market pricing.
During 2014, 2013 and 2012, we sold 7.2 million, 8.6 million and 8.9 million metric tons of iron ore concentrate and pellets, respectively, from our Eastern Canadian Iron Ore mines, with the segment’s five largest customers together accounting for a total of 88 percent, 70 percent and 62 percent of Eastern Canadian Iron Ore product revenues, respectively. Refer to Concentration of Customers below for additional information regarding our major customers.
Investments
Amapá
On December 27, 2012, our Board of Directors authorized the saleUnless otherwise noted, discussion of our 30 percent interestbusiness and results of operations in Amapá. Per this original agreement, together with Anglo, we wereAnnual Report on Form 10-K refers to sell our respective interest in a 100 percent sale transaction to Zamin.continuing operations.
On March 28, 2013, an unknown event caused the Santana port shiploader to collapse into the Amazon River, preventing further ship loading by the mine operator, Anglo. In light of the Santana port shiploader collapse and subsequent evaluation of the effect that this event had on the carrying value of our investment in Amapá as of June 30, 2013, we recorded an impairment charge of $67.6 million in the second quarter of 2013.
On August 28, 2013, we entered into additional agreements to sell our 30 percent interest in Amapá to Anglo for nominal cash consideration, plus the right to certain contingent deferred consideration upon the two-year anniversary of the closing. The closing was conditional on obtaining certain regulatory approvals and the additional agreement provided Anglo with an option to request that we transfer our interest in Amapá directly to Zamin. Anglo exercised this option and the transfer to Zamin closed in the fourth quarter of 2013. Our interest in Amapá previously was reported as our Latin American iron ore operating segment.
Sonoma
On July 10, 2012, we entered into a definitive share and asset sale agreement to sell our 45 percent economic interest in the Sonoma joint venture coal mine located in Queensland, Australia. Upon completion of the transaction on November 12, 2012, we collected approximately AUD $141.0 million in net cash proceeds. The assets sold included our interests in the Sonoma mine along with our ownership of the affiliated wash plant, which were previously reported as our Asia Pacific Coal operating segment. Production and sales totaled approximately 2.8 million and 2.9 million metric tons of coal, respectively, through the sale completion date.
Applied Technology, Research and Development
We have been a leader in iron ore mining and process technology since inception and have been in operation for more than 160over 170 years. We operated some of the first mines on Michigan’s Marquette Iron Range and pioneered early
open-pit and underground mining methods. From the first application of electrical power in Michigan’s underground mines to the use of today’s sophisticated computers and global positioning satellite systems, we have been a leader in the application of new technology to the centuries-old business of mineral extraction. Today, our engineering and technical staffs are engaged in full-time technical support of our operations, and improvement of existing products and development of new products.
We are a pioneer in iron ore pelletizing with over 60 years of experience. We are able to produce customized pellets to meet each customer’s blast furnace specifications and produce both standard and fluxed pellets. Using our technical expertise and strong market position in the United States to increase our product offering, we have started producing DR-grade pellets. In 2017 and 2016, we shipped low silica DR-grade pellets, which were successfully processed in multiple DRI reactors to produce a high-quality direct reduced iron product.
With state-of-the-art equipment andour experienced technical professionals we remain on the forefront of mining technology. We have anand unsurpassed reputation for our pelletizing technology, deliveringwe continue to deliver a world-class quality product to a broad range of sophisticated end users.our customers. We are a pioneer in the development of emerging reduction technologies, a leader in the extraction of value from challenging resources and a frontrunnerfront runner in the implementation of safe and sustainable technology. Our technical experts are dedicated to excellence and deliver superior technical solutions tailored to our customer base. We will continue to use this pioneering mentality in the development of our HBI facility in Toledo, Ohio. Similar to the market shift to pellets over 60 years ago, we recognize the need to serve the growing EAF market.
Concentration of Customers
Based on re-casted information to account for the acquisition of Severstal assets in Dearborn, Michigan by AK Steel in 2014In 2017 and 2012, we had2016, two customers that individually accounted for more than 10 percent10% of our consolidated product revenue. In 2013, we had one customer thatrevenue and in 2015, three customers individually accounted for more than 10 percent10% of our consolidated product revenue. Product revenue from those customers represented in the chart below totaled approximately $1.6$1.3 billion, $1.5$1.1 billion and $1.6$1.3 billion of our total consolidated product revenue in 2014, 20132017, 2016 and 2012,2015, respectively, and is attributable to our U.S. Iron Ore North American Coal and Eastern Canadian Iron Ore business segments.segment. The following represents sales revenue from each of these customers as a percentage of our total consolidated product revenue, as well as the portion of product sales for U.S. Iron Ore Eastern Canadian Iron Ore and North American Coal that is attributable to each of these customers in 2014, 2013 and 2012, respectively:for those years:
|
| | | | | | | | | | |
| | | | Percentage of Total Product Revenue1 |
Customer2 | | 2014 | | 2013 | | 2012 |
| ArcelorMittal | | 22 | % | | 19 | % | | 17 | % |
AK Steel3 | | 15 | % | | 9 | % | | 12 | % |
1 Excluding freight and venture partners’ cost reimbursements. |
2 Includes subsidiaries. |
3 Effective September 16, 2014, AK Steel completed the acquisition of Severstal North America's integrated steelmaking assets located in Dearborn, Michigan. For comparative purposes, we have combined historical data for all periods presented. |
|
| | | | | | | | | | | | | |
| | | | Percentage of Total Product Revenue | | Percentage of U.S. Iron Ore
Product Revenue |
Customer1 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| ArcelorMittal | | 38% | | 37% | | 37% | | 48% | | 51% | | 49% |
| AK Steel | | 23% | | 19% | | 21% | | 29% | | 27% | | 29% |
Algoma2 | | 9% | | 4% | | 12% | | 11% | | 5% | | 15% |
| |
1 Includes subsidiaries. |
2 On October 5, 2015, we terminated the long-term agreement with Algoma; however, we entered into certain short-term contracts with Algoma throughout 2016. On May 16, 2016, we reinstated our agreement with Algoma, which took effect in January 2017. |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of U.S. Iron Ore Product Revenue1 | | Percentage of North American Coal Product Revenue1 | | Percentage of Eastern Canadian Iron Ore Product Revenue1 |
Customer2 | | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 |
| ArcelorMittal | | 40 | % | | 36 | % | | 32 | % | | 7 | % | | 7 | % | | 5 | % | | — | % | | 10 | % | | 9 | % |
AK Steel3 | | 28 | % | | 21 | % | | 27 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
1 Excluding freight and venture partners’ cost reimbursements. |
2 Includes subsidiaries. |
3 Effective September 16, 2014, AK Steel completed the acquisition of Severstal North America's integrated steelmaking assets located in Dearborn, Michigan. For comparative purposes, we have combined historical data for all periods presented. |
ArcelorMittal USA
OurHistorically, our pellet supply agreements with ArcelorMittal USA are the basis for supplying pellets to ArcelorMittal USA, which iswere based on customer requirements, except for the Indiana Harbor East facility, which is based on customer excess requirements.contract obligations. The following table outlineslegacy agreements with ArcelorMittal USA expired at the expiration datesend of December 2016 and January 2017. The parties executed a new long-term agreement, which became effective October 31, 2016, for eachthe sale and delivery of ArcelorMittal USA’s annual tonnage requirements that fall within a specific range of volume. This latest agreement expires at the respective agreements:
|
| |
Facility | Agreement
Expiration
|
Cleveland Works and Indiana Harbor West facilities | December 2016 |
Indiana Harbor East facility | January 2017 |
end of December 2026.ArcelorMittal USA is a 62.3 percent62.3% equity participant in Hibbing, as well as, a 21.0 percent equity partnerHibbing. During 2017, we acquired the 21% ownership interest of ArcelorMittal USA in Empire with limited rights and obligations.as part of an agreement to distribute the noncontrolling interest net assets of the mine.
In 2014, 20132017, 2016 and 2012,2015, our U.S. Iron Ore pellet sales to ArcelorMittal were 10.28.4 million, 9.59.7 million and 8.69.7 million tons, respectively, and our Eastern Canadian Iron Ore pellet and concentrate sales to ArcelorMittal were none, 0.9 million and 0.7 million metriclong tons, respectively.
In 2014, 2013 and 2012, our North American Coal sales to ArcelorMittal were 0.5 million, 0.5 million and 0.3 million tons, respectively. We do not have any contracts with ArcelorMittal associated with the remaining North American Coal operations, due to our major contract with ArcelorMittal being transferred to the buyer of our CLCC operations. The sale of CLCC was completed on December 31, 2014.
AK Steel
On September 16, 2014, AK Steel announced an acquisition of Severstal North America’s integrated steelmaking assets located in Dearborn, Michigan. We have a long-term relationship to supply iron ore pellets to Severstal’s steelmaking assets at that location. Upon consummation of the acquisition, the contract was automatically assigned to AK Steel. The combination of sales pursuant to our preexisting sales agreement with AK Steel and the acquisition of the Dearborn facility with its sales agreement accounts for more than 10 percent of our consolidated product revenue in 2014.
OnIn August 29, 2013, we entered into a new agreement with AK Steel to provide iron ore pellets to AK Steel for use in its Middletown, Ohio and Ashland, Kentucky blast furnace facilities. This contract includes minimum and maximum tonnage requirements for each year between 2014 and 2023.
Under the original agreementIn 2015 we entered into an amended and restated agreement with AK Steel after it acquired Severstal in 2006,Dearborn, LLC, under which we supply all of the Dearborn, Michigan facility’s blast furnace pellet requirements through 2022, subject to specified minimum and maximum requirements in certain years. AK Steel was the successor by merger of this contract and it remains in force. In September 2014, we entered into an amendment to the Dearborn contract with AK Steel to document the 2013 base pricing provisions, among other things, which resulted from an arbitration ruling in May 2014.
In 2014, 20132017, 2016 and 2012,2015, our U.S. Iron Ore pellet sales to AK Steel and the acquired Dearborn facility were 5.85.6 million, 4.14.5 million and 5.74.3 million long tons, respectively.
Algoma
Algoma is a Canadian steelmaker whose common shares are owned by Essar Steel Holdings Limited. We had a long-term supply agreement under which we were Algoma’s sole supplier of iron ore pellets through the end of 2016. Under the terms of a 2016 settlement and through Algoma's CCAA proceedings, Algoma agreed to assume the long-term supply agreement that runs through 2024. Additionally, we entered into agreements with Algoma to purchase from us incremental tonnage that equates to Algoma's 2015 through 2017 annual iron ore pellet consumption. These agreements began in 2017 and 2018 and run through December 2020.
In 2017, 2016 and 2015, our U.S. Iron Ore pellet sales to Algoma were 2.5 million, 1.2 million and 2.5 million long tons, respectively.
Competition
Throughout the world, we compete with major and junior mining companies, as well as metalssteel companies, both of which produce steelmaking raw materials, including iron ore and metallurgical coal.ore.
North America
In our U.S. Iron Ore business segment, we primarily sell our product to steel producers with operations in North America. In our now shuttered Eastern Canadian Iron Ore business segment, we primarily had provided our product to the seaborne market for Asian steel producers. We compete directly with steel companies that own interests in iron ore mines in the United States and/or Canada, including ArcelorMittal and U.S. Steel, and with major iron ore pellet exporters from AustraliaEastern Canada and Brazil. Additionally, in the last year, there has been a 38 percent increase in steel imported into the U.S. to 44.3 million tons during the first 11 months of 2014, despite the imposition of new import tariffs last summer. This reduced demand for U.S. produced steel and directly affect the demand for iron ore within North America.
In the coal industry, our North American Coal business segment competes with many metallurgical coal producers of various sizes, including Alpha Natural Resources, Inc., Patriot Coal Corporation, CONSOL Energy Inc., Arch Coal, Inc., Walter Energy, Inc., Peabody Energy Corp. and other producers located in North America and globally.
A number of factors beyond our control affect the markets in which we sell our iron ore and coal.ore. Continued demand for our iron ore and metallurgical coal and the prices obtained by us primarily depend on the consumption patterns of the steel industry in the U.S., China and elsewhere around the world, as well as the availability, location, cost of transportation and competing prices. Coal consumption patterns primarily are affected by demand, environmental and other governmental regulations and technological developments. The most important factors on which we compete are delivered price, coal quality characteristics such as heat value, sulfur, ash, volatile matter and moisture content and reliability of supply. Metallurgical coal, which primarily is used to make coke, a key component in the steelmaking process, generally sells at a premium over thermal coal due to its higher quality and value in the steelmaking process.
Asia Pacific
In our Asia Pacific Iron Ore business segment, we export iron ore products to the Asia Pacific markets, including China, Japan, Korea and Taiwan.South Korea. In the Asia Pacific marketplace, we compete with major iron ore exporters primarily from Australia Brazil, South Africa and India.Brazil. These include Anglo, BHP Billiton, Fortescue Metals Group Ltd., Rio Tinto plc and Vale SA, among others.
Competition in steelmaking raw materials is predicated upon the usual competitive factors of price, availability of supply, product quality and performance, service and transportation cost to the consumer of the raw materials.
Environment
Our mining and limited exploration activities are subject to various laws and regulations governing the protection of the environment. We conduct our operations in a manner that is protective of public health and the environment and believe our operations are in compliance with applicable laws and regulations in all material respects.
Environmental issues and their management continued to be an important focus at each of our operations throughout 2014.2017. In the construction of our facilities and in their operation, substantial costs have been incurred and will continue to be incurred to comply with regulatory requirements and avoid undue effect on the environment. Our capital expenditures relating to environmental matters totaled approximately $33$21 million, $32$15 million and $31$17 million, in 2014, 20132017, 2016 and 2012,2015, respectively. Approximately $5 million of the 2015 capital expenditures relating to environmental matters was attributable to the North American Coal operations that were sold during December 2015. It is estimated
that capital expenditures for environmental improvements will total approximately $42$11 million in 2015. Estimated expenditures in 2015 are comprised of approximately $35 million for projects in2018, which is related to our U.S. Iron Ore operations and $7 million in our North American Coal operations for various water treatment, air quality, dust control, seleniumtailings management, tailingsselenium management and other miscellaneous environmental projects.
Regulatory Developments
Various governmental bodies continually promulgate new or amended laws and regulations that affect our Company,us, our customers and our suppliers in many areas, including waste discharge and disposal, the classification of materials and products, air and water discharges and many other environmental, health and safety matters. Although we believe that our environmental policies and practices are sound and do not expect that the application of any current laws or regulations reasonably would be expected to result in a material adverse effect on our business or financial condition, we cannot predict the collective adverse impact of the expanding body of laws and regulations.
Specifically, there are several notable proposed or potential rulemakings or activities that could potentially have a material adverse impact on our facilities in the future depending on their ultimate outcome: Minnesota's proposed amendments to the sulfate wild rice water quality standard; evolving water quality standards for sulfate, selenium, and conductivity; scope of the Clean Water Act and the definition of “Waters of the United States”; Minnesota's Mercury TMDL and associated rules governing mercury air emission reductions; Climate Change and GHG Regulation,Regulation; Regional Haze FIP Rule; NO2 and SO2 National Ambient Air Quality Standards, Cross State Air Pollution Rule,NAAQS; and increased administrative and legislative initiatives related to coalfinancial assurance obligations for CERCLA, mining and reclamation obligations.
Minnesota’s Proposed Amendments to the Sulfate Wild Rice Water Quality Standard
The Minnesota Legislature provided $1.5 million in 2011 for a study to gather additional information about the effects of sulfate and other substances on the growth of wild rice and to support an update to the sulfate wild rice water quality standard originally adopted in 1973 by the MPCA. The MPCA contracted with the University of Minnesota to conduct several research projects as part of this study. Concurrently, the Minnesota Chamber of Commerce contracted an independent lab to conduct companion research on the impacts of sulfate on wild rice. In August 2017, MPCA released proposed amendments of the sulfate water quality standard applicable to wild rice and identification of wild rice waters, which included a proposed sulfate wild rice water quality standard, a proposed list of waters where the standard would apply, and criteria for adding waters to that list. The proposed wild rice water quality standard is an equation that utilizes measured sediment parameters to calculate a sulfate water quality standard protective of wild rice unique to each water body where the standard applies. The independent research conducted by the independent lab contracted by the Minnesota Chamber of Commerce does not directly support the validity of the MPCA’s proposed approach. On January 11, 2018, the proposed rule was substantially disapproved by an ALJ and included a recommendation for MPCA to retain the existing 10 mg/L sulfate standard until MPCA addresses concerns identified in the ALJ report. These findings are not binding on the MPCA. The rulemaking has a legislated deadline for completion of January 15, 2019. Due to the proposed standard being based on measured sediment parameters, uncertainty regarding to which waters the standard will apply, and the non-binding disapproval from the ALJ, the impact of the proposed wild rice water quality standard to us is not estimable at this time but it could have an adverse material impact if we are required to significantly reduce sulfate in our discharges.
Conductivity
Conductivity, the measurement of water’s ability to conduct electricity, is a surrogate parameter that generally increases as the amount of dissolved minerals in water increases. In 2011, the EPA issued A Field-Based Aquatic Life Benchmark for Conductivity in Central Appalachian Streams, which established a recommended conductivity benchmark of 300 µS/cm for the region. The issuance of a benchmark outside of the established rulemaking process was subsequently the subject of litigation in 2012 where the court ruled the benchmark is nothing more than a non-binding suggestion. Three years later in Ohio Valley Environmental Coalition, et al. v. Elk Run Coal Co., et al., 3:12-cv-00785 (S.D. W. Va.), a judicial decision held that levels of conductivity higher than the EPA’s benchmark constituted a violation of the state’s narrative water quality standards, were unsupported by science and contrary to decisions previously made by the West Virginia Department of Environmental Protection and the West Virginia Supreme Court. In 2015, a group filed a petition with EPA Region 5 alleging that Minnesota was failing to implement properly the state NPDES program, and one of the various allegations asserts that MPCA should be assessing compliance with the state’s narrative water quality standard against the EPA’s conductivity benchmark for the Central Appalachian region. On December 30, 2015, the EPA provided MPCA a draft of the Protocol for Responding to Issues Related to Permitting and Enforcement which indicates that EPA staff will be reviewing available scientific basis in peer reviewed literature as well as promulgated standards. In February 2016, EPA's Office of Research and Development endorsed use of the Field-Based Conductivity Benchmark in northeast Minnesota indicating that a value of 320 µS/cm was appropriate to protect aquatic life. On
December 23, 2016, EPA issued a notice soliciting public comments on its draft document, Field-Based Methods for Developing Aquatic Life Criteria for Specific Conductivity. According to EPA, once this document is final, states and authorized tribes located in any region of the country may use the methods to develop field-based specific conductivity criteria for adoption into water quality standards. In April 2017, comments were submitted by our trade associations providing objective evidence indicating the draft methodology was scientifically flawed and unfit for promulgation. Adoption of this methodology is not certain due to significant concerns with respect to the scientific validity of the proposed method which is now under intense review by scientists working for various trade associations. Because the outcome of the Region 5 Petition is uncertain and the proposed Field-Based Methods for Developing Aquatic Life Criteria for Specific Conductivity is only draft guidance at this time, the exact nature and certainty of the potential risk to us cannot be predicted; however, direct application of the 320 µS/cm benchmark to our Minnesota-based assets may have a material adverse impact if the conductivity benchmark is applied to our NPDES permits.
Definition of “Waters of the United States” Under the Clean Water Act
In June 2015, the EPA and Army Corps of Engineers promulgated the rule, “Definition of ‘Waters of the United States’ Under the Clean Water Act,” which attempted to add clarity to which waters are jurisdictional under the federal Clean Water Act, and will apply to all Clean Water Act programs, including certain permitting programs, spill prevention programs and a state certification process. It is unclear how the federal and state agencies will implement and enforce the final rule, and how the courts will interpret it going forward. The regulation may expand EPA’s authority under the Clean Water Act to many traditionally unregulated mine features such as mine pits, pit lakes, on-site ditches, water retention structures, and tailings basins creating a new burden on our U.S. facilities. This could be further interpreted to add questionable regulatory authority over the groundwater connections between these features and nearby traditionally navigable waters. In October 2015, the U.S. Court of Appeals for the Sixth Circuit issued a nationwide stay of this rule while the jurisdiction and legality of the rule are decided in court. In January 2017, the U.S. Supreme Court granted certiorari to reconsider the Sixth Circuit's decision that it has jurisdiction to hear challenges. We are actively participating in the rulemaking development and assessing the potential impacts to our operations. Any impacts to us are not estimable at this time as the rule is being litigated, and the impacts will not be known until the rule is finally implemented.
The “Executive Order on Restoring the Rule of Law, Federalism, and Economic Growth by Reviewing the ‘Waters of the United States’ Rule” ("Executive Order") was signed by the President on February 28, 2017. This Executive Order instructs EPA and the Army Corps of Engineers to review the Clean Water Rule and “publish for notice and comment a proposed rule rescinding or revising the rule.” The Executive Order further directs that they “shall consider interpreting the term ‘navigable waters’” in a manner “consistent with Justice Scalia’s opinion” in Rapanos v. United States (2006). The EPA and Army Corps of Engineers are in the process of conducting rulemaking, soliciting comments, and holding public meetings in accordance with the Executive Order. Any impacts to us are not estimable at this time as the EPA and Army Corps of Engineers have only begun to implement the Executive Order.
Selenium Discharge Regulation
In Michigan, Empire and Tilden have implemented compliance plans to manage selenium according to the permit conditions. Empire and Tilden submitted the first permit-required Selenium Storm Water Management Plan to the Michigan Department of Environmental Quality ("MDEQ") in December 2011 and have updated it annually as required. The Selenium Storm Water Management Plans have outlined the activities that have been undertaken to address selenium in storm water discharges from our Michigan operations including an assessment of potential impacts to surface and groundwater. The remaining infrastructure needed for implementation of the storm water collection and conveyance system was completed in 2017 and cost approximately $8 million. A storm water treatment system for both facilities is anticipated sometime before 2028. The cost of the future treatment systems could be significant, although we are continuing to assess and develop cost effective and sustainable treatment technologies.
Tilden's NPDES permit contains a compliance schedule for selenium with a final effluent limit of 5.1 µg/l that became effective as of November 1, 2017, at Tilden's Gribben Tailings Basin outfall. Tilden's 2017 expenditures totaled approximately $3 million for infrastructure necessary to meet the selenium effluent limit.
In July 2016, the EPA published new selenium fish tissue limits and lower lentic and lotic water column concentration criteria, which may someday increase the cost for treatment should MDEQ adopt these new standards in lieu of the existing limits established under the Great Lakes Initiative. Accordingly, we cannot reasonably estimate the timing or long-term impact of the water quality criteria to our business.
Mercury TMDL and Minnesota Taconite Mercury Reduction Strategy's evolving scopeStrategy
Since the 1990’s the taconite industry has voluntarily reduced and removed mercury products and supported development of mercury emission reduction technology. While TMDL regulations are contained in the Clean Water Act, and definitionin 2007, Minnesota developed a Statewide Mercury TMDL which set an objective for 93% mercury air emission reductions from 1990 levels for sources within Minnesota. The State of “WatersMinnesota has acknowledged that approximately 90% of the United States”mercury entering the state’s airshed is from other national and Selenium Discharge Regulation.international sources.
TableIn September 2014, Minnesota promulgated the Mercury Air Emissions Reporting and Reduction Rule mandating mercury air emissions reporting and reductions from certain sources. The rule is applicable to all of Contentsour Minnesota operations and requires submittal of a Mercury Reduction Plan to reduce mercury emissions from taconite furnaces by 72% by January 2025. The Mercury Reduction Plans must be submitted by December 31, 2018. One of the main tenets agreed upon for evaluating potential mercury reduction technologies during TMDL implementation and 2014 rule development proceedings was that the selected technology would meet the following “Adaptive Management Criteria”: the technology must be technically feasible; must be economically feasible; must not impact pellet quality; and must not cause excessive corrosion in pellet furnaces, associated duct work and existing wet scrubbers on the furnaces. However, the final 2014 rule does not explicitly include all four Adaptive Management Criteria for evaluating mercury reduction technologies, which were agreed upon in Minnesota’s October 2009 Mercury TMDL Implementation Plan.There is currently no proven technology to cost effectively reduce mercury emissions from taconite furnaces to the target level of 72% that would meet all four Adaptive Management Criteria. We remain concerned about the technical and economic feasibility to reduce taconite mercury emissions by 72% without impacting existing operations or other environmental permit obligations. We are in the process of conducting detailed engineering analysis and potential technology testing to determine the impact of the regulations on each unique taconite furnace affected by this rule. The results of this analysis will guide further dialogue with the MPCA regarding development of the 2018 Mercury Reduction Plans. Potential impacts to us are not estimable at this time as the development of potential mercury reduction technology remains in its early stages.
Climate Change and GHG Regulation
With the complexities and uncertainties associated with the U.S. and global navigation of the climate change issue as a whole, one of our potentially significant risks for the future is mandatory carbon legislation.pricing obligations. Policymakers are in the design process of carbon regulation at the state, regional, national and international levels. The current regulatory patchwork of carbon compliance schemes presents a challenge for multi-facility entities to identify their near-term risks. Amplifying the uncertainty, the dynamic forward outlook for carbon regulationpricing obligations presents a challenge to large industrial companies to assess the long-term net impacts of carbon compliance costs on their operations. Our exposure on this issue includes both the direct and indirect financial risks associated with the regulation of GHG emissions, as well as potential physical risks associated with climate change. We are continuing to review the physical risks related to climate change utilizing our formal ERM process. As an energy-intensive business, our GHG emissions inventory includes a formal risk management process.broad range of emissions sources, such as iron ore furnaces and kilns, diesel mining equipment and our wholly owned Silver Bay power generation plant, among others. As such, our most significant regulatory risks are: (1) the costs associated with on-site emissions levels (direct impacts), and (2) indirect costs passed through to us from electrical and fuel suppliers (indirect impacts).
Internationally, mechanisms to reduce emissions are being implemented in various countries, with differing designs and stringency, according to resources, economic structure and politics. We expect that momentum to extend carbon regulation will continue. Australia and Canada are signatories to the Kyoto Protocol. As such, our facilities in each of these countries are impacted by the Kyoto Protocol, but in varying degrees according to the mechanisms each country establishes for compliance and each country’s commitment to reducing emissions. Australia and Canada are considered Annex 1 countries, meaning that they are obligated to reduce their emissions under the Protocol. The impactcontinue with implementation of the Kyoto ProtocolParis climate agreement that was adopted in 2015, the aim of which is to keep the increase in global average temperature to below two degrees Celsius. Continued political attention to issues concerning climate change, the role of human activity in it and potential mitigation through regulation may have a material impact on our Canadiancustomer base, operations has diminished withand financial results in the idling of our Canadian operations.future.
In Australia, legislation for a carbon tax was passed in July 2012. The direct impact of the carbon tax on our Asia Pacific operations primarily occurs through increased fuel costs. The tax was estimated to result in an increase in direct costs of approximately A$3.5 million per year however following a change of Federal Government in September 2013 the carbon tax was repealed in July 2014.
In the U.S., federal carbon regulation potentially presents a significantly greater impact to our operations. To date, the U.S. Congress has not legislated carbon constraints. In the absence of comprehensive federal carbon legislation, numerous state, regional, and regionalfederal regulatory initiatives are under development or are becoming effective, thereby creating a disjointed approach to GHG control and potential carbon control. Onpricing impacts. In May 2010, the EPA promulgated the GHG Tailoring Rule establishing a mechanism for regulating GHG emissions from facilities through the Prevention of Significant Deterioration permitting program under the Clean Air Act. Under the GHG Tailoring Rule, as modified by a 2014 U.S. Supreme Court decision upholding some components of the rule, new projects that increase GHG emissions by a significant amount (generally more than 75,000 long tons of CO2 emissions per year) and significantly increase emissions of at least one non-GHG criteria pollutant are subject to the Prevention of Significant
Deterioration requirements, including the installation of best available control technology. We do not expect the Tailoring Rule provision to have a material adverse effect on our business in the near term and we cannot reliably estimate the long-term impact of the regulation.
In June 25, 2013, President Obama issued a memorandum directing the EPA to develop carbon emission standards for both new and existing power plants under the Clean Air Act's NSPS. On January 8, 2014, theNew Source Performance Standards ("NSPS"). In October 2015, EPA proposed NSPS regulating carbon dioxide emissions from new fossil fuel-fired power plants. On June 2, 2014, EPA proposed the ‘Clean Power Plan’promulgated a CPP which consists of NSPS regulating carbon dioxide from existing power plants at a level 30 percentof approximately 32% below 2005 levels by 2030. States must submit Clean Power Plan SIPs by June 2016, though extension waivers will be made available. As proposed these rulesThe CPP would not affect ourregulate combined heat and power generating facilities such as at Northshore's Silver Bay power generating facility.Power. The CPP directed states to submit SIPs to EPA by September 2016, but on February 9, 2016, the U.S. Supreme Court stayed the CPP immediately halting implementation. In March 2017, President Trump signed the Energy Independence Executive Order which called for, among other things, a review of the CPP and, if appropriate, reconsideration proceedings to suspend, revise, or rescind the rule. On the same day, Administrator Pruitt signed a notice indicating EPA’s intent to review and, if appropriate, to propose to revise or rescind the CPP. The U.S. Court of Appeals for the D.C. Circuit has been holding CPP litigation in abeyance since April 2017. On October 10, 2017, following a review as directed by President Trump’s Energy Independence Executive Order, the EPA proposed a rule to repeal the CPP and accepted comments on the proposed rule until January 16, 2018. The ultimate outcome of these carbon emission standards is not expected in the near term.
As an energy-intensiveDue to the EPA's Tailoring Rule and potential patchwork state or regional carbon restriction schemes, our business ourand customer base could suffer negative financial impacts over time as a result of increased energy, environmental and other costs to comply with the limitations that would be imposed on GHG emissions inventory captures a broad range of emissions sources, such as iron ore furnaces and kilns, coal thermal driers, diesel mining equipment and our wholly owned Silver Bay power generation plant, among others. As such, our most significant regulatory risks are: (1) the costs associated with on-site emissions levels, and (2) the costs passed through to us from power generators and distillate fuel suppliers.
emissions. We believe our exposure can be reduced substantially by numerous factors, including currently contemplated regulatory flexibility mechanisms, such as allowance allocations, fixed process emissions exemptions, offsets and international provisions; emissions reduction opportunities, including energy efficiency, biofuels, fuel flexibility, emerging shale gas, coal mine methane offset reduction; and business opportunities associated with pursuing combined heat and power partnerships and new products, including DR-grade pellets, fluxed pellets and technology.other efficiency-improving technologies.
We have worked proactively to develop a comprehensive, enterprise-wide GHG management strategy aimed at considering all significant aspects associated with GHG initiatives to plan effectively for and manage climate change issues, including risks and opportunities as they relate to the environment,environment; stakeholders, including shareholders and the public,public; legislative and regulatory developments, operations,developments; operations; products and markets.
Regional Haze FIP Rule
In June 2005, the EPA finalized amendments to its regional haze rules. The rules require states to establish goals and emission reduction strategies for improving visibility in all Class I national parks and wilderness areas.areas to natural background levels by 2064. Among the states with Class I areas are Michigan Minnesota, Alabama and West VirginiaMinnesota, in which we currently own and manage mining operations. The first phase of the regional haze rule (2008-2018) requiresrequired analysis and installation of BARTBest Available Retrofit Technology ("BART") on eligible emission sources and incorporation of BART and associated emission limits into SIPs.
Minnesota submitted a regional haze SIP to the EPA on December 30, 2009,disapproved Minnesota's and a supplement to the SIP on May 8, 2012. Michigan submitted its regional haze SIP to the EPA on November 5, 2010. During the second quarter of 2012, the EPA also sent information requests to all taconite facilities requesting information on SO2 and NOx emissions
and control technology assessments. On June 12, 2012, the EPA approved revisions to the Minnesota SIP addressing regional haze, but also announced it was deferring action on emission limitations that Minnesota intended to represent BARTMichigan's SIPs for taconite facilities. On August 15, 2012, the EPA proposed to deny the Michiganfurnaces and Minnesota taconite SIP BART determinations and simultaneously proposedinstead promulgated a separateTaconite Regional Haze FIP for taconite facilities. During the comment period for the proposed FIP rule, the taconite industry andin February 2013. We, along with other stakeholders, developed detailed commentspetitioned the Eighth Circuit Court of Appeals for a review of the FIP, and shared informationin May 2013, we filed a joint motion for stay of the 2013 FIP, which was granted in June 2013. We, along with the other stakeholders, reached a settlement agreement with EPA to address furnace specific case-by-case circumstances. Onresolve certain items in the 2013 FIP. The settlement agreement, which was published in the Federal Register in January 15,2015 and fully executed in April 2015, prompted EPA to grant partial reconsideration of the 2013 FIP in July 2015. Subsequently, EPA published a FIP revision final rule to implement components of the EPA signedsettlement agreement in April 2016, with an effective date of May 12, 2016. We believe the final FIP for taconite facilities. The final2016 Regional Haze FIP reflects progress toward a more technically and economically feasible regional haze implementation planplan. In November 2016, the Eighth Circuit Court of Appeals terminated the June 2013 stay and eliminatesextended the need for investing in additional SO2 emission control equipment. However, we remain concerned about the technical and economic feasibility of EPA's BART determination for NOx emissions and we filed a petition for reviewdeadlines in the 8th Circuit Court and subsequently received a judicial stay of the FIP which enabled us to conduct a detailed engineering analysis to determine the impact of the regulations on each unique iron ore indurating furnace affected by this rule. The results of this analysis enabled us to reach a settlement with EPA which was public noticed in the Federal Register on January 30, 2015.original 2013 FIP. Cost estimates associated with implementation of the settlement2013 and 2016 FIPs are reflected in our 5-yearfive-year capital plan.
Due to inconsistencies in language describing the procedures for calculating NOx emission limits between the settlement agreement and the 2016 FIP final rule, we jointly filed a Petition for Reconsideration and Petition for Judicial Review in June 2016. We have been working toward a settlement agreement with EPA to resolve the outstanding issue with the emission limit calculation method and anticipate resolution of the issue in 2018. The outcome of this proceeding is not expected to have a material adverse impact to the business.
NO2 and SO2 National Ambient Air Quality StandardsNAAQS
During the first half of 2010, the EPA promulgated rules that require statesrequired each state to use a combination of air quality monitoring and computer modeling to determine areas of each state that are instate's attainment withclassification status against new one-hour NO2 and SO2 standards and those areas that are not in attainment with such standards.NAAQS. During the third quarter of 2011, the EPA issued guidance to the regulated community on conducting refined air quality dispersion modeling and implementing the new NO2 and SO2 standards. TheIn 2012, Minnesota issued Administrative Orders ("AOs") requiring taconite facilities to conduct modeling to demonstrate compliance with the NO2 and SO2 standards have been challenged by various large industry groups. Accordingly, at this time, we are unableNAAQS pursuant to predict the final impact of these standards. During June 2011, our Minnesota iron ore mining operations received a request fromTaconite Regional Haze SIP Long Term Strategy ("LTS"). Compliance with the MPCA to developLTS modeling and compliance plans and timelines by which each facility would demonstrate compliance with present and proposed NAAQS as well as regional haze requirements outlined in the SIP. Compliance must be achieved bydemonstrations was originally set for June 30, 2017, accordingbut Minnesota has not advanced work on its 2012 AOs and is expected to remove NAAQS modeling obligations under the initial state orders, althoughLTS in light of reduction in haze emissions associated with implementation of the EPA has indicated that thetaconite Regional Haze FIP regulations.
All of our operations in Minnesota and Michigan are expected to be in attainment for NO2 and SO2 attainment area designation timelines have been extended out to 2020. WeNAAQS without incurring additional capital investment. While we will continue to monitor these developments and assess options by whichpotential impacts, we do not anticipate further capital investments will be necessary to achieve complianceaddress NO2 and seek alignment between the state and federal expectations.
Cross State Air Pollution Rule
On July 6, 2011, the EPA promulgated the CSAPR, which was intended to be an emissions trading rule for SO2 and NOx. Northshore's Silver Bay Power PlantNAAQS requirements at this time.
CERCLA 108(b)
In December 2016, EPA published a proposed amendment to CERCLA section 108(b) which is focused on developing financial assurance for managing hazardous substances in the hardrock mining industry. EPA had a court-mandated deadline for publication of the final rule by December 1, 2017. The proposed rule would have been subjectrequired hardrock mining facilities to calculate their level of financial responsibility based on a formula included in the rule, secure an instrument or otherwise self-insure for the calculated amount, demonstrate to EPA the proof of the security, and maintain the security until EPA releases facilities from the CERCLA 108(b) regulations. The iron mining industry notified EPA of several errors upon which EPA drafted the rule, including a mistaken reliance on reporting data from a wholly different industry sector (iron and steel toxic release inventory reporting). We also participated in developing industry specific and national trade association comments and advocating directly with EPA and the White House Office of Management & Budget to address this rule, however Minnesota elected to follow EPA guidance allowing CSAPR to stand as BART. CSAPR was vacated by the D.C. Circuit Court during the third quarterand other errors with goals of 2012. Late in 2014, the Supreme Court re-instated CSAPR with an effective date of January 1, 2015, re-instating the obligations of this rule for Silver Bay Power. Immediate compliance obligations are being met at this time,exempting iron ore mining from CERCLA 108(b) applicability and correcting other deficiencies with the material obligation being procurementproposed rule. On December 1, 2017 EPA signed a federal register notice of the first year of emissions allowances by March 2016EPA's decision not to issue final regulations for financial responsibility requirements for the 2015 operating year. Silver Bay Power is completing the engineering and permitting work to install controls that will limit the cost exposure to the trading market. The allowance pricing market is continuing to fluctuate so price impacts are not yet certain, we anticipate the annual costs will be less than $1 million for 2015 and gradually decreasing to less than $400,000 per year after we complete our emission reduction project in 2017.
Increased Administrative and Legislative Initiatives Related to Coal Mining Activities
Although the focushardrock mining industry under section 108(b) of significantly increased government activity related to coal mining in the U.S. is generally targeted at eliminating or minimizing the adverse environmental impacts of mountaintop coal mining practices, these initiatives have the potential to impact all types of coal operations, including subsurface longwall mining typically deployed for recovering metallurgical coal. Specifically, the coordinated efforts by various federal agencies to further regulate mountaintop mining have slowed issuance of the permits required by many mining projects in Appalachia. Due to the developing nature of these initiatives and their potential to disrupt even routine mining and water permit practices in the coal industry, we are unable to predict whether these initiatives could have a material effect on our coal operations in the future. We are working closely with our trade associations to monitor the various rulemaking developments in an effort to enable us to develop viable strategies to minimize the financial impact to the business.
Mercury TMDL and Minnesota Taconite Mercury Reduction Strategy
TMDL regulations are contained in the Clean Water Act. As a part of Minnesota's Mercury TMDL Implementation Plan, in cooperation with the MPCA, the taconite industry developed a Taconite Mercury Reduction Strategy and signed a voluntary agreement in 2009 to effectuate its terms. The strategy includes a 75 percent target reduction of mercury air emissions from Minnesota pellet plants collectively by 2025. It recognizes that mercury emission control technology currently does not exist and will be pursued through a research effort. According to the voluntary agreement, any developed technology must meet the “adaptive management criteria” suchCERCLA because EPA determined that the technology must be economically feasible, must not impact pellet quality, and must not cause excessive corrosion in pellet furnaces,risks associated duct work andwith these facilities' operations are addressed by existing wet scrubbers on the furnaces.
According to the voluntary agreement, the mines proceeded with medium- and long-term testing of possible technologies. For Cliffs, the requirements in the voluntary agreement applies to the United Taconite and Hibbing facilities. At this time, we are unable to predict the potential impacts of the voluntary Taconite Mercury Reduction Strategy. However, a number of research projects were conducted between 2011 and 2014 as the industry continues to assess options for reduction. While injection of powdered activated carbon into furnace off-gasses for mercury capture in the wet scrubbers showed positive initial results, further testing during 2013 yielded lower overall potential. Alternate technologies are presently being assessed in our ongoing efforts to develop cost effective mercury reduction technologies for our indurating furnaces.
On September 22, 2014, Minnesota promulgated the Mercury Air Emissions Reporting and Reduction Rule mandating mercury air emissions reporting and reduction. The adopted rule expanded applicability to all of our Minnesota operations and requires submitting a mercury reduction plan in 2018 to reduce mercury emissions from all of our Minnesota taconite furnaces by 72 percent by January 2025 and 70 percent reduction from Northshore’s industrial boilers by January 1, 2018. The adopted rule does not include all four Adaptive Management Criteria for evaluating mercury reduction, which were agreed upon in the October 2009 Minnesota’s Mercury TMDL Implementation Plan.
To date, there is currently no proven technology to cost effectively reduce mercury emissions from taconite furnaces to the target level of 72 percent that would meet all four Adaptive Management Criteria. We remain concerned about the technical and economic feasibility to reduce taconite mercury emissions by 72 percent and are conducting detailed engineering analysis to determine the impact of the regulations on each unique iron ore indurating furnace affected by this rule. The results of this analysis will guide further dialog with the MPCA regarding our implementation of the requirements.
Selenium Discharge Regulation
Our North American Coal operations have numerous NPDES permits with either selenium discharge limits or draft permits with selenium limits. We have achieved, or have projects underway that will achieve compliance at all discharges. As such, we do not believe this issue will likely have a material impact to our North American Coal operations.
In Michigan, the MDEQ issued renewed NPDES permits for our Empire mine in December 2011 and for our Tilden mine in 2012. Our Michigan operations at Empire and Tilden are developing compliance strategies to meet new selenium process water limits according to the permit conditions. Empire and Tilden submitted the Selenium Storm Water Management Plan to the MDEQ in December 2011. The Selenium Storm Water Management Plan outlines the activities that will be undertaken to address selenium in storm water discharges from our Michigan operations. The activities include the evaluation of structural controls, non-structural controls, site specific standards, and evaluation of potential impacts to groundwater. Pilot treatment systems have had good initial results and evaluation work continues. An initial estimate for full scale implementation of storm water treatment systems and structural selenium controls at both facilities is approximately $63 million. The results from the evaluation of existing pilot and demonstration-scale work will determine if these structural controls are utilized, or if alternatives must be applied.
Tilden's NPDES permit renewal became effective on November 1, 2012. The permit contains a compliance schedule for selenium with a limit of five µg/l that will be effective as of November 1, 2017, at Tilden's Gribben Tailings Basin outfall. Tilden has initiated a prudent and feasible alternatives analysis to further define solutions and cost estimates. Preliminary testing and engineering for end-of-pipe solutions indicates capital costs are likely to be less than the previously estimated range of $96 million to $146 million. The next phase of engineering and updated cost estimates are scheduled to be concluded in the first half of 2015. In May 2014, the EPA proposed new selenium fish tissue limits and a lower lentic water column concentration criterion which may increase the cost for treatment. We are incorporating this contingency into our planning and treatment technology development.
Definition of “Waters of the United States” Under the Clean Water Act
The EPA and Army Corps of Engineers’ proposed rule, “Definition of ‘Waters of the United States’ Under the Clean Water Act,” 79 Fed. Reg. 22188 (Apr. 21, 2014), attempts to add clarity to which waters are jurisdictional under the federal Clean Water Act, and will apply to all Clean Water Act programs, including the Sec. 402 and Sec. 404 permitting programs, Sec. 311 spill prevention program and Sec. 401 state certification process. It is unclear how the federal and state agencies will implementprograms and enforce the final rule,regulations and how the courts will interpret going forward, however, there is substantial cause to be concerned in several areas of the draft. The draft regulation may expand EPA’s authority under the Clean Water Act to many traditionally unregulated mine features such as mine pits, pit lakes, on site ditches, water retention structures, and tailings basins creating a new burden on our U.S. facilities. This could further be interpreted to add questionable regulatory authority over the groundwater connections between these features and nearby traditionally navigable waters. We are actively participating in the rulemaking development and assessing the potential impacts to our operations.
For additional information on our environmental matters, refer to Item 3. Legal Proceedings and NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.modern industry practices.
Energy
Electricity
The state of Michigan is a deregulated electricity state, which affords our mines the ability to purchase electrical energy supply from various suppliers while continuing to purchase distribution service from the incumbent utility. As of September 1, 2013, our Tilden and Empire mines in Michigan exercised the right to purchase electrical supply from Integrys Energy Services while continuing to purchase distribution service from Wisconsin Electric Power Company. The pricing of electricity in the deregulated market is based on the Midwestern Independent System Operator Day-Ahead price. Beginning on February 1, 2015, we began purchasing our electricity supply from the Wisconsin Electric Power Company in a regulated fashion as we terminated our contract with Integrys Energy Services. As of February 1, 2015, Wisconsin Electric Power Company is the sole supplier of electric power to our Empire and Tilden mines.mine. During April 2015, the Tilden mine executed a special electricity contract with Wisconsin Electric Power Company. The term of the contract is through 2019. Wisconsin Electric Power Company provides 300170 megawatts of electricity to Empire and Tilden at special rates that are regulated by the MPSC. The Empire andpricing under these contracts is generally fixed except Tilden mines are subject to changes in Wisconsin Electric Power Company's rates, such as base interim rate changes that Wisconsin Electric Power Company may self-implement and final rate changes that are approved by the MPSC in response to applications filed by Wisconsin Electric Power Company. Additionally, Empire and Tilden areis subject to frequent changes in Wisconsin Electric Power Company's power supply adjustment factor. During August 2016, Tilden executed a new 20-year special contract with Wisconsin Electric that is anticipated to start on January 1, 2020.
ElectricTilden and Empire may also incur additional liabilities depending on the outcome of various proceedings concerning MISO's revised cost allocation methodology for continued operation of the Presque Isle Power Plant in Michigan. If FERC's award of SSR costs based on a revised cost allocation methodology applied retroactively is affirmed by the U.S. Court of Appeals for the District of Columbia Circuit, this could result in a cash payment of $12.3 million related to our Tilden mine and our indefinitely-idled Empire mine. As of December 31, 2017, this liability is included in our Statements of Consolidated Financial Position as part of Accrued expenses. Refer to NOTE 20 - COMMITMENTS AND CONTINGENCIES for further discussion of the Michigan Electricity Matters.
Minnesota Power supplies electric power forto the Hibbing and United Taconite mines is supplied by Minnesota Power. Onmines. During September 16, 2008, the minesHibbing finalized agreementsan agreement with terms from November 1, 2008 through December 31, 2015. The agreements wereagreement was approved by the Minnesota Public Utilities Commission ("MPUC") in 2009. The terms of the agreement included an automatic five-year extension that began January 2016. The United Taconite mine executed a new ten-year agreement with Minnesota Power that also included the Babbitt Mine. This agreement was finalized in May 2016 and was approved by the MPUC in 2009.November 2016.
Silver Bay Power, Company, a wholly ownedwholly-owned subsidiary of ours, with a 115 megawatt power plant, providesis able to provide the majority of Northshore’s electrical energy requirements. Silver Bay Power has an interconnection agreement with Minnesota Power for backup power when excess generation is necessary.
Wabush had a 20-year In May 2016, Silver Bay Power entered into an agreement with NewfoundlandMinnesota Power which ended December 31, 2014. This agreement allowed for an exchangeto purchase roughly half of water rights in return for the powerNorthshore's electricity needs for Wabush’s mining operations. Beginning onfrom Minnesota Power through 2019. On January 1, 2015, Wabush has a short-term electricity agreement with Newfoundland Hydro Power. The pricing of this agreement is set by the Labrador industrial rate policy. The Wabush pelletizing operation and the Bloom Lake operation in Québec are served by Québec Hydro, which provides power under regulated rates that are set on an annual basis.
The Oak Grove mine and Concord Preparation Plant are supplied electrical power by Alabama2020, Silver Bay Power under a five-year contract that continues in effect until terminated by either party providing written notice to the other in accordance with applicable rules, regulations and rate schedules. Rateswill purchase 100% of the contract are subjectelectricity requirements of Northshore from Minnesota Power and Silver Bay Power plans to change during the termidle both of the contract as regulated by the Alabama Public Services Commission.
Electrical power to the Pinnacle Complex is supplied by the Appalachian Power Companyits generating units except under a regulated electrical supply contract. The contract specifies the applicable rate schedule, minimum monthly charge and power capacity furnished. Rates, terms and conditions of the contract are subject to the approval of the Public Service Commission of West Virginia.certain circumstances.
Koolyanobbing and its associated satellite minesmine deposits draw power from independent diesel-fueled power stations and generators. Diesel power generation capacity has been installed at the Koolyanobbing operations.
Process and Diesel Fuel
We have a long-term contract providing for the transport of natural gas on the Northern Natural Gas Pipeline for our U.S. Iron Ore operations. Our Pinnacle and Oak Grove coal operations also use natural gas, but purchase it through their local regulated utility, Mountaineer Gas and Alabama Gas Co., respectively. At U.S. Iron Ore, the Empire and Tilden mines havehas the capability of burning natural gas, coal or, to a lesser extent, oil. The Hibbing and Northshore mines have the capability to burn natural gas and oil. The United Taconite mine has the ability to burn coal, natural gas and petroleum coke. Consistent with 2014,2017, we expect during 20152018 our U.S. Iron Ore operations will utilize both natural gas and coal to heat furnaces and produce power at our Silver Bay Power facility. At Eastern Canadian
All of our mines utilize diesel fuel mainly for our mobile fleet. Thompson Gas supplies diesel fuel to all of our U.S. Iron Ore locations from the Wabush mine has the capability to burn bunker fuel, stove and furnace oils and coke breeze and the Bloom Lake mine has the ability to burn stove and furnace oils.Husky refinery in Superior, Wisconsin. Our Eastern CanadianU.S. Iron Ore process fuel is primarily supplied by Imperial Oil, a subsidiarylocations are contracted with Thompson Gas through the end of Exxon Mobil, through contracts.2018.
Employees
As of December 31, 2014,2017, we had a total of 5,3862,938 employees.
|
| | | | | | | | | |
| | | 2014 | | 2013 | | 2012 |
U.S. Iron Ore1 | | | | | | |
| Salaried | | 658 |
| | 700 |
| | 715 |
|
| Hourly | | 2,705 |
| | 2,825 |
| | 2,976 |
|
| Total | | 3,363 |
| | 3,525 |
| | 3,691 |
|
Asia Pacific Iron Ore 2 | | | | | | |
| Salaried | | 139 |
| | 177 |
| | 216 |
|
| Hourly | | — |
| | — |
| | — |
|
| Total | | 139 |
| | 177 |
| | 216 |
|
| North American Coal | | | | | | |
| Salaried | | 237 |
| | 379 |
| | 406 |
|
| Hourly | | 821 |
| | 1,207 |
| | 1,210 |
|
| Total | | 1,058 |
| | 1,586 |
| | 1,616 |
|
Eastern Canadian Iron Ore2 | | | | | | |
| Salaried | | 231 |
| | 407 |
| | 459 |
|
| Hourly | | 320 |
| | 973 |
| | 956 |
|
| Total | | 551 |
| | 1,380 |
| | 1,415 |
|
| Corporate & Support Services | | | | | | |
| Salaried | | 275 |
| | 470 |
| | 625 |
|
| Hourly | | — |
| | — |
| | 26 |
|
| Total | | 275 |
| | 470 |
| | 651 |
|
| Total | | 5,386 |
| | 7,138 |
| | 7,589 |
|
| | | | | | | |
1 Includes our employees and the employees of the U.S. Iron Ore joint ventures. |
2 Excludes contracted mining employees |
As of December 31, 2014, approximately 85.0 percent of our U.S. Iron Ore hourly employees, approximately 100.0 percent of our Eastern Canadian Iron Ore hourly employees and approximately 100.0 percent of our North American Coal hourly employees were covered by collective bargaining agreements. |
| | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
U.S. Iron Ore - Salaried1 | | 537 |
| | 523 |
| | 509 |
|
U.S. Iron Ore - Hourly1,3 | | 2,171 |
| | 2,178 |
| | 1,813 |
|
Asia Pacific Iron Ore - Salaried2 | | 78 |
| | 82 |
| | 90 |
|
Discontinued Operations - Salaried2 | | — |
| | 4 |
| | 32 |
|
Discontinued Operations - Hourly2 | | — |
| | — |
| | 41 |
|
Corporate & Support Services - Salaried4 | | 152 |
| | 140 |
| | 153 |
|
| Total | | 2,938 |
| | 2,927 |
| | 2,638 |
|
| | | | | | | |
1 Includes our employees and the employees of the U.S. Iron Ore joint venture. |
2 Excludes contracted mining employees. |
3 Excludes employees considered on lay-off status as a result of an indefinite or temporary idle. |
4 Includes employees of our HBI project. |
Hourly employees at our Michigan and Minnesota iron ore mining operations, excluding Northshore, are represented by the USW. TheUSW and are covered by labor agreements between the USW and our various operating entities. These labor agreements that cover approximately 2,2001,800 active USW-represented employees at our Empire and Tilden mines in Michigan, and our United Taconite and Hibbing mines in Minnesota are effective September 1, 2012valid through September 30, 2015.2018. Employees at our Northshore operations are not represented by a union and are not, therefore, covered by a collective bargaining agreement.
Hourly employees at our Eastern Canadian Iron Ore operations also are represented by the USW. The labor agreement with the USW that covers our represented employees at Bloom Lake is effective from September 1, 2013
through August 31, 2016. The labor agreement with the USW that covers our represented employees at our Pointe Noire facility, is effective from March 1, 2014 through February 28, 2020.
Hourly employees at our Lake Superior and IshpemingLS&I railroads are represented by seven unions covering approximately 105100 employees. The labor agreements that cover these employees reopened for bargaining on December 31, 2014 and we are actively bargaining with the seven unions that represent them for successor agreements. These employees negotiate under the Railway Labor Act, which provides that labor agreements remain in force until replaced by a successor agreement. Under the Railway Labor Act work stoppages cannot occur until the parties have engaged in substantial negotiations, have mediated any disputes and have received a release from the National Mediation Board.
Hourly production and maintenanceSalaried employees at our Pinnacle Complex and Oak Grove mines are represented by the UMWA. Our labor agreements with the UMWA at those locations are effective July 1, 2011 through December 31, 2016. Those agreements are identical in all material respects to the NBCWA of 2011 between the UMWA and the National Bituminous Coal Operators’ Association.
Employees at ourU.S. Iron Ore, Asia Pacific Iron Ore, Corporate and Support Services are not represented by a union and are not, therefore, covered by collective bargaining agreements.
Safety
Safety is our primary core value as we continue towardstoward a zero incidentinjury culture at all of our operating facilities. We continuously monitor, trackmeasure and measuretrack our safety performance and make changes where necessary.frequent improvements to affect change. Best practices and incident learnings are shared globally to ensure each mine site can embedeffectively administer our policies procedures and learningsprocedures for enhanced workplace safety. We measure progressProgress toward achieving our objectiveobjectives is accomplished through a focus on proactive initiatives and results measured against regularly established industry and company benchmarks, including measuringour company-wide TRIR.Total Reportable Incident Rate ("TRIR"). During 2014,2017, our TRIR (including contractors) was 2.021.32 per 200,000 man-hours worked.
Refer to Exhibit 95 Mine Safety Disclosures (filed herewith) for mine safety information required in accordance with Section 1503(a) of the Dodd-Frank Act.
Available Information
Our headquarters are located at 200 Public Square, Suite 3300, Cleveland, Ohio 44114-2315, and our telephone number is (216) 694-5700. We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the SEC. Copies of these reports and other information can be read and copied at:
SEC Public Reference Room
100 F Street N.E.
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s home page at www.sec.gov.
We use our website, www.cliffsnaturalresources.comwww.clevelandcliffs.com, as a channel for routine distribution of important information, including news releases, investor presentations and financial information. We also make available, free of charge on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file these documents with, or furnish them to, the SEC. In addition, our website allows investors and other interested persons to sign up to receive automatic email alerts when we post news releases and financial information on our website.
We also make available, free of charge on our website, the charters of the Audit Committee, Governance and Nominating Committee and Compensation and Organization Committee as well as the Corporate Governance Guidelines and the Code of Business Conduct &and Ethics adopted by our Board of Directors. These documents are available through our investor relations page on our website at ir.cliffsnaturalresources.comwww.clevelandcliffs.com. The SEC filings are available by selecting “Financial Information” and then “SEC Filings,” and material and corporate governance ismaterials are available by selecting “Corporate Governance” for the Board Committee Charters, operational governance guidelines and the Code of Business Conduct and Ethics.
References to our website or the SEC’s website do not constitute incorporation by reference of the information contained on such websites, and such information is not part of this Annual Report on Form 10-K.
Copies of the above-referenced information are also available, free of charge, by calling (216) 694-5700 or upon written request to:
Cliffs Natural ResourcesCleveland-Cliffs Inc.
Investor Relations
200 Public Square, Suite 3300
Cleveland, OH 44114-2315
EXECUTIVE OFFICERS OF THE REGISTRANT
Following are the names, ages and positions of the executive officers of the Company as of February 25, 2015.14, 2018. Unless otherwise noted, all positions indicated are or were held with Cliffs Natural ResourcesCleveland-Cliffs Inc.
|
| | |
| Name | Age | Position(s) Held |
| Lourenco Goncalves | 5760 | Chairman, of the Board, President and Chief Executive Officer (August 2014 - present); and Chairman, President and Chief Executive Officer of Metals USA Holdings Corp., anAmerican manufacturer and processor of steel and other metals (May 2006 - April2013); President, Chief Executive Officer and a director of Metals USA Inc. (February 2003 - April 2006). |
| Terry G. Fedor | 5053 | Executive Vice President, United StatesU.S. Iron Ore (January 2014 - present); and VicePresident, U.S. Iron Ore Operations (February 2011 - January 2014). |
| Timothy K. Flanagan | 40 | Executive Vice President, Chief Financial Officer (January 2017 - present); Treasurer (March 2016- December 2017); Vice President, Corporate Controller and General ManagerChief Accounting Officer (March 20052012 - February 2011) of ArcelorMittal Cleveland, a fully integrated steelmaking facility.December 2016); and Assistant Controller (February 2010 - March 2012). |
| James D. Graham | 4952 | Executive Vice President (November 2014 - present); Chief Legal Officer (March 2013 - present); Secretary (March 2014 - present); Vice President (January 2011 - October 2014); and General Counsel - Global Operations (January 2011 - March 2013); Assistant General Counsel (April 2007 - December 2010). |
| Maurice D. Harapiak | 5356 | Executive Vice President, Human Resources (June(March 2014 - present); Chief Administration Officer (January 2018 - present); and Regional Director, Human Resources - Barrick Gold of North America, a gold mining company (November2011 - JuneMarch 2014); Senior Director, Human Resources, Capital Projects - Barrick Gold Corporation, a gold mining company (November 2007 - November 2011). |
| Terrence R. Mee | 4548 | Executive Vice President, Global Commercial (October 2014 - present); Vice President, Global Iron Ore Sales (February 2014 - October 2014); Senior Vice President, Global Iron Ore Sales (March 2012 - February 2014); and Senior Vice President, Global Iron Ore &and Metallic Sales (January 2011 - March 2012); Vice President, Sales and Transportation (September 2007 - January 2011). |
Terrance M. Paradie | 46 | Executive Vice President (March 2013 - present); Chief Financial Officer (October 2012 - present); Treasurer (September 2014 - February 2015); Senior Vice President (January 2011 - March 2013); Assistant General Manager - Michigan Operations (March 2012 - September 2012); Corporate Controller (October 2007 - March 2012); Chief Accounting Officer (July 2009 - March 2012); Vice President (October 2007 - January 2011). |
| Clifford T. Smith | 5558 | Executive Vice President, Business Development (April 2015 - present); Executive Vice President, Seaborne Iron Ore (January 2014 − present)- April 2015); Executive Vice President, Global Operations (July 2013 - January 2014); Executive Vice President, Global Business Development (March 2013 - July 2013); and Senior Vice President, Global Business Development (January 2011 - March 2013); Vice President, Latin American Operations(September 2009 - January 2011). |
P. Kelly Tompkins | 58 | Executive Vice President, Business Development (October 2014 - present); Executive Vice President, External Affairs and President, Global Commercial (November 2013 - October 2014); Chief Administrative Officer (July 2013 - November 2013); Executive Vice President, Legal, Government Affairs and Sustainability (May 2010 - July 2013). Chief Legal Officer (January 2011 - January 2013); President, Cliffs China (October 2012 - November 2013); Executive vice president and chief financial officer of RPM International Inc., a specialty coatings and sealants manufacturer (June 2008 - May 2010). |
David L. Webb | 57 | Executive Vice President (January 2014 - present); Senior Vice President, Global Coal (July 2011 - January 2014); Vice president and general manager of Mid-West Operations for Patriot Coal Corp., a producer of thermal and metallurgical coal (2007 - June 2011).
|
Timothy K. FlanaganR. Christopher Cebula | 3747 | Vice President, Corporate Controller & Chief Accounting Officer (March 2012(February 2017 - present); Assistant Controller (FebruarySenior Director, Corporate Financial Planning & Analysis (April 2013 - February 2017); Senior Director, Enterprise Risk Management (April 2010 - March 2012); and Director, Internal Audit (April 2008 - February 2010)2013). |
All executive officers serve at the pleasure of the Board. There are no arrangements or understandings between any executive officer and any other person pursuant to which an executive officer was selected to be an officer of the Company. There is no family relationship between any of our executive officers, or between any of our executive officers and any of our directors.
An investment in our common shares or other securities is subject to risk inherent to our business and our industry. Described below are certain risks and uncertainties, the occurrences of which could have a material adverse effect on us. Before making an investment decision, you should consider carefully all of the risks described below together with the other information included in this report. The risks and uncertainties described below are not the only onesinclude known material risks that we face.face currently. Although we have significantextensive risk management policies, practices and procedures aimed to mitigate these risks, uncertainties may nevertheless impair our business operation. This report is qualified in its entirety by these factors.
Our ERM function provides a framework for management's consideration of risk when making strategic, financial, operational and/or project decisions. The framework is based on ISO 31000, an internationally recognized risk management standard. Management uses a consistent methodology to identify and assess risks, determine and implement risk mitigation actions, and monitor and communicate information about the Company's key risks. Through these processes, we have identified six categories of risk that we are subject to: (I) economic and market, (II) regulatory, (III) financial, (IV) operational, (V) development and sustainability and (VI) human capital. The following risk factors are presented according to these key risk categories.
| |
I. | ECONOMIC AND MARKET RISKS |
The volatility of commodity prices, namely iron ore and coal,steel, affects our ability to generate revenue, maintain stable cash flow and to fund our operations, including growth and expansion projects.
As a mining company, our profitability is dependent upon the price of the commodities that we sell to our customers and the price of the products our customers sell, namely iron ore and coal.steel prices. The pricesprice of iron ore has fluctuated significantly in the past and coal have fluctuated historically and areis affected by factors beyond our control, including: steel inventories; international demand for raw materials used in steel production; rates of global economic growth, especially construction and infrastructure activity that requires significant amounts of steel; recession or reducedchanges in the levels of economic activity in the U.S., China, India, Europe and other industrialized or developing countries; uncertainties or weaknesses in global economic conditions such as the sovereign debt crisis in Europe and the U.S. debt ceiling; changes in production capacity of other iron ore and metallurgical coal suppliers, especially as additional supplies comesupply comes online or where there is a significant increase in imports of steel into the U.S. or Europe; changes in trade laws; weather-related disruptions or natural disasters that may impact the global supply of iron ore and metallurgical coal;ore; and the proximity, capacity and cost of infrastructure and transportation.
Our earnings, therefore, may fluctuate with the prices of the commodities we sell. To the extent that the prices of these commoditiesiron ore and steel, including the average hot-rolled coil steel price, significantly decline for an extended period of time, we may have to revise our operating plans, including curtailing production, reducing operating costs and capital expenditures and discontinuing certain exploration and development programs. We also may have to take impairments on our long-lived assets inventory and/or goodwill.inventory. Sustained lower prices also could cause us to further reduce existing reserves if certain reserves no longer can be economically mined or processed at prevailing prices. We may be unable to decrease our costs in an amount sufficient to offset reductions in revenues and may incur losses. These events could have a material adverse effect on us.
Uncertainty or weaknesses in global economic conditions, and reduced economic growth in China and oversupply of iron ore and excess steel or imported products could affect adversely our business.
The world pricesprice of iron ore and coal areis influenced strongly by international demand and global economic conditions. Uncertainties or weaknesses in global economic conditions, including the ongoing sovereign debt crisis in Europe, could affect adversely our businessinternational demand and negatively impact our financial results.supply for iron ore products. In addition,particular, the current level of international demand for raw materials used in steel production is driven largely by industrial growth in China. IfUncertainties or weaknesses in global economic conditions, including the slowing economic growth rate in China, slows for an extended period of time, or if another global economic downturn were to occur, we would likely seehas resulted, and could in the future result, in decreased demand for our products and, together with oversupply of imported products, has and may continue to lead to decreased prices, resulting in lower revenue levels and decreasing margins.margins, which have in the past and may in the future affect adversely our business and negatively impact our financial results. We are not able to predict whether the global economic conditions will continueimprove or worsen and the impact it may have on our operations and the industry in general going forward.
Capacity expansions and limited rationalization of supply capacity within the mining industry could lead to lower or more volatile global iron ore and coal prices, impacting our profitability.
Continued globalGlobal growth of iron ore and coal demand, particularly from China, resulted in iron ore and metallurgical coal suppliers expanding their production capacity.capacity over the past few years. The supply of both iron ore and metallurgical coal has increased due to these expansions. In the current iron ore and coal markets, an increaseThe previous increases in our competitors’ capacity could resultalong with actual reduced demand resulted in excess supply of these commodities, resulting iniron ore continue to cause downward pressure on prices. This decrease inThe limited rationalization of supply capacity has led to volatile pricing would adverselywhich can have an adverse impact on our sales, margins and profitability.
If steelmakers use methods other than blast furnace production to produce steel or use other inputs, or if their blast furnaces shut down or otherwise reduce production, the demand for our current iron ore and coal products may decrease.
Demand for our iron ore and coal products in North America is determined by the operating rates for the blast furnaces of steel companies. However, not all finished steel is produced by blast furnaces; finished steel also may be produced by other methods that use scrap steel, pig iron, hot briquetted iron and direct reduced iron. North American steel producers also can produce steel using imported iron ore, or semi-finished steel products or other lighter-weight steel alternatives, which eliminates the need for domestic iron ore. Future environmental restrictions on the use of blast furnaces in North America also may reduce our customers’ use of their blast furnaces. Maintenance of blast furnaces may require substantial capital expenditures.expenditures and may cause prolonged outages, which may reduce demand for our pellets. Our customers may choose not to maintain, or may not have the resources necessary to maintain, their blast furnaces. If our customers use methods to produce steel that do not use iron ore and coal products,pellets or if environmental or maintenance issues occur, demand for our current iron ore and coal products will decrease, which would affect adversely our sales, margins, profitability and profitability.cash flows.
Due to economic conditions and volatility in commodity prices, or otherwise, our customers could approach us about modification of their supply agreements. Modificationsagreements or fail to our salesperform under such agreements, potentially could be made due to such volatility, which could impact adversely our sales, margins, profitability and cash flows.
Although we have long-term contractual commitments for a majority of the sales in our U.S. Iron Ore and Eastern Canadian Iron Ore business, for 2015 and beyond, the uncertainty in global economic conditions may impact adversely impact the ability of our customers to meet their obligations. As a result of such market volatility, our customers could approach us about modifying their supply agreements or fail to perform under such agreements. AnyConsidering our limited base of current and potential customers, any modifications to our sales agreements or customers' failures to perform under such agreements could impact adversely impact our sales, margins, profitability and cash flows. These discussions orFor example, of the potential customers in the North American integrated steel industry, one is in reorganization proceedings, and certain others have experienced financial difficulties. A loss of sales to our existing customers could have a substantial negative impact on our sales, margins, profitability and cash flows. Other potential actions by our customers could also result in additional contractual disputes whichand could ultimately require arbitration or litigation, either of which could be time consuming and costly. Any such disputes and/or failure to renew existing contracts on favorable terms could impact adversely our sales, margins, profitability and cash flows.
II. REGULATORY RISKS
We are subject to extensive governmental regulation, which imposes, and will continue to impose, potential significant costs and liabilities on us. Future laws and regulationregulations or the manner in which they are interpreted and enforced could increase these costs and liabilities or limit our ability to produce iron ore and coal products.
New laws or regulations, or changes in existing laws or regulations, or the manner of their interpretation or enforcement, could increase our cost of doing business and restrict our ability to operate our business or execute our strategies. This includes, among other things, the possible taxation under U.S. law of certain income from foreign operations, compliance costs and enforcement under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and costs associated with complying with the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010 and the regulations promulgated thereunder.thereunder and any replacement or amendments thereof. In addition, we are subject to various federal, provincial, state and local laws and regulations in each jurisdiction in which we have operations for employeehuman health and safety, air quality, water pollution, plant, wetlands, natural resources and wildlife protection, reclamation and restoration of mining properties, the discharge of materials into the environment, the effects that mining has on groundwater quality, conductivity and availability, and related matters. Numerous governmental permits and approvals are required for our operations.
We cannot be certain that we have been or will be at all times in complete compliance with such laws, regulations, permits and approvals. If we violate or fail to comply with these laws, regulations, permits or approvals, we could be fined or otherwise sanctioned by regulators. Compliance with the complex and extensive laws and regulations that to which
we are subject to imposes substantial costs, which we expect will continue tocould increase over time because of increased regulatory oversight, adoption of increasingly stringent environmental standards, and increased demand for remediation services leading to shortages of equipment, supplies and labor, as well as other factors.
Specifically, there are several notable proposed or recently enacted rulemakings or activities to which we would be subject or that would further regulate and/or tax our customers, namely the North American integrated steel producer customers, that may also require us or our customers to reduce or otherwise change operations significantly or incur significant additional costs, depending on their ultimate outcome. These emerging or recently enacted rules, regulations and policy guidance include, but are not limited to: trade regulations, include:such as possible changes to the North American Free Trade Agreement; numerous air regulations, such as climate change and greenhouse gas regulation, regional haze regulation, NAAQS including but not limited to those for NO2 and SO2,, the CSAPR; increased administrative and legislative initiatives related to coal mining activities; Minnesota’s Mercury Air Emissions Reporting and Reduction Rule,Rule; Mercury Total Maximum Daily Load requirements and Taconite Mercury Reduction Strategy; selenium discharge regulation; conductivity water quality standards for aquatic life; expansion of federal jurisdictional authority to regulate groundwater and various other water quality regulations. Such new or more stringent legislation, regulations, interpretations or orders, when enacted and enforced, could have a material adverse effect on our business, results of operations, financial condition or profitability.
Although the numerous regulations, operating permits and our management systems mitigate potential impacts to the environment, our operations inadvertently may inadvertently impact the environment or cause exposure to hazardous substances, which could result in material liabilities to us.
Our operations currently use and have used in the past, hazardous materials, and, from time to time, we have generated solid and hazardous waste. We have been, and may in the future be, subject to claims under federal, provincial, state and local laws and regulations for toxic torts, natural resource damages and other damages as well as for the investigation and clean-up of soil, surface water, sediments, groundwater and other natural resources.resources and reclamation of properties. Such claims for damages and reclamation may arise out of current or former conditions at sites that we own, lease or operate currently, as well as sites that we or our acquired companies have owned, leased or operated, and at contaminated sites that have always been owned, leased or operated by our joint-venturejoint venture partners. Our liability for suchthese claims may be strict, and/or joint and several, sosuch that we may be held responsible for more than our share of the contamination or other damages, or even for the entire share.share regardless of fault. We are subject to a variety of potential liability exposures arising, or otherwise involved in investigation and remediation activities, at certain sites. In addition to sites currently owned, leased or operated, sites, these include sites where we formerly conducted iron ore and/or coal mining or processing or other operations, inactive sites that we currently own, predecessor sites, acquired sites, leased land sites and third-party waste disposal sites. We may be named as a responsible party at other sites in the future and we cannot be certain that the costs associated with these additional sites will not be material.
We also could be held liablesubject to litigation for any and all consequencesalleged bodily injuries arising out of humanfrom claimed exposure to hazardous substances allegedly used, released, or disposed of by us. In particular, we and certain of our subsidiaries arewere involved in various claims relating to the exposure of asbestos and silica to seamen who sailed until the mid-1980s on the Great Lakes vessels formerly owned and operated by certain of our subsidiaries. The full impactWhile several hundred of these claims continues toagainst us had been combined in a multidistrict litigation docket and have since been dismissed and/or settled for non-material amounts, there remains a possibility that similar types of claims could be unknown. Uncertainty also remains as to whether insurance coverage will be sufficient and whether other defendants namedfiled in these claims will be able to fund any costs arising out of these claims.the future.
Environmental impacts as a result of our operations, including exposures to hazardous substances or wastes associated with our operations, could result in costs and liabilities that could materially and adversely affect our margins, cash flow or profitability.
We may be unable to obtain andand/or renew permits necessary for our operations or be required to provide additional financial assurance, which could reduce our production, cash flows, profitability and profitability.available liquidity. We also could face significant permit and approval requirements that could delay our commencement or continuation of exploration andnew or existing production operations which, in turn, could affect materially our cash flows, profitability and profitability.available liquidity.
Prior to commencement of mining, we must submit to and obtain approval from the appropriate regulatory authority of plans showing where and how mining and reclamation operations are to occur. These plans must include information such as the location of mining areas, stockpiles, surface waters, haul roads, tailings basins and drainage from mining operations. All requirements imposed by any such authority may be costly and time-consuming and may delay commencement or continuation of exploration or production operations.
Mining companies must obtain numerous permits that impose strict conditions on various environmental and safety matters in connection with coal and iron ore mining. These include permits issued by various federal, state and provinciallocal agencies and regulatory bodies. The permitting rules are complex and may change over time, making our ability to comply with the applicable requirements more difficult or impractical and costly, possibly precluding the continuance of ongoing operations or the development of future mining operations. Interpretations of rules may also change over time and may lead to requirements, such as additional financial assurance, making it more costly to comply. The public, including special interest groups and individuals, have certain rights under various statutes to comment upon, submit objections to, and otherwise engage in the permitting process, including bringing citizens’ lawsuits to challenge such permits or mining activities. Accordingly, required permits may not be issued or renewed in a timely fashion (or at all), or permits issued or renewed may be conditioned in a manner that may restrict our ability to efficiently conduct our mining activities.and production activities efficiently, including the requirement for additional financial assurances that we may not be able to provide on commercially reasonable terms or at all and which would further limit our borrowing base under our ABL Facility. Such inefficiencies could reduce our production, cash flows, profitability and profitability.
Our North American coal operations are subject to increasing levels of regulatory oversight making it more difficult to obtain and maintain necessary operating permits.
The current political and regulatory environment in the U.S. is disposed negatively toward coal mining, with particular focus on certain categories of mining such as mountaintop removal techniques. Therefore, our coal mining operations in North America are subject to increasing levels of scrutiny. Although we do not engage in mountaintop mining, emerging U.S. regulatory efforts targeted at eliminating or minimizing the adverse environmental impacts of mountaintop and underground coal mining practices have impacted all types of coal operations. These regulatory initiatives could cause material impacts, delays, or disruptions to our coal operations due to our inability to obtain new or renewed permits or modifications to existing permits.
Underground mining is subject to increased safety regulation and may require us to incur additional compliance costs.
Recent mine disasters have led to the enactment and consideration of significant new federal and state laws and regulations relating to safety in underground coal mines. These laws and regulations include requirements for constructing and maintaining caches for the storage of additional self-contained self-rescuers throughout underground mines; installing rescue chambers in underground mines; continuous tracking of and communication with personnel in the mines; installing cable lifelines from the mine portal to all sections of the mine to assist in emergency escape; submission and approval of emergency response plans; and new and additional safety training. Additionally, new requirements for the prompt reporting of accidents and increased fines and penalties for violations of these and existing regulations have been implemented. These new laws and regulations may cause us to incur substantial additional costs, which may impact adversely our results of operations, financial condition or profitability.available liquidity.
A substantial majority of our sales are made under term supply agreements with specified duration to a limitedlow number of customers that contain price-adjustment clauses that could affect adversely the stability and profitability of our operations.
In 2014, aA majority of our U.S. Iron Ore North American Coal and Eastern Canadian Iron Ore sales and almost all of our Asia Pacific Iron Ore sales wereare made under term supply agreements with specified durations to a limited number of customers. In 2014, fiveFor the year ended December 31, 2017, approximately 74% of our revenues from product sales and services was derived from the North American integrated steel industry and three customers together accounted for approximately 72 percent88% of our U.S. Iron Ore Eastern Canadian Iron Ore, and North American Coal product sales revenues (representing more than 57 percent70% of our consolidated revenues). For North American Coal, prices typically are agreed upon for a 12-month period and typically are adjusted each year. Our Asia Pacific Iron Ore contracts are due to expirelegacy agreements with ArcelorMittal USA expired at various dates until March 2015 for our Chinese and Japanese customers. Asthe end of December 2016 and January 2017. The parties executed a long-term agreement, which became effective October 31, 2014,2016 and expires at the end of December 2026. Our average remaining duration of our U.S. Iron Ore contracts as of December 31, 2017 is approximately seven years. Pricing under our contract with ArcelorMittal is adjusted by the price of hot-rolled coil steel in the U.S. domestic market, and iron ore and general inflation indices. As a result of this and other pricing constructs contained in our customer contracts and those anticipated in future periods, our financial results have increased sensitivity to changes in iron ore and steel prices. Our Asia Pacific Iron Ore annually-negotiated contracts are with steel companies primarily in China, Japan and South Korea. In March 2017, we extended the majority of our supply agreements with steel producers in China for one year. These contracts will expire in March 2018, and we will only renew contracts if it can be done in an economically viable manner. Our supply agreement with our client in South Korea expired in December 2017. We renewed that agreement for 2018; however, it is at a lower committed quantity than our previous agreement. Our supply agreements with our customers in Japan expire in March 2018. These contracts could be renewed for an additional term. Pricing for our Asia Pacific Iron Ore Chinese customers consists of shorter-term pricing mechanisms of various durations up to three months based on the average of daily spot prices that are generally associated with the time of unloading of each shipment. Pricing with our Japanese and South Korean customers is generally similar to the inputs used with our Chinese customers, but the pricing inputs are fixed before shipment.
Our existing and future indebtedness may limit cash flow available to invest in the ongoing needs of our business, which could prevent us from fulfilling our obligations under our senior notes and ABL Facility.
As of December 31, 2017, we had an average remaining durationaggregate principal amount of four years. We cannot$2,439.4 million of long-term debt, $400.0 million of which was secured (excluding $46.5 million of outstanding letters of credit and $47.8 million of capital leases), and $1,007.7 million of cash on our balance sheet. As of December 31, 2017, no loans were drawn under the ABL Facility and we had total availability of $273.2 million as a result of borrowing base limitations. As of December 31, 2017, the principal amount of letters of credit obligations and other commitments totaled $46.5 million, thereby further reducing available borrowing capacity on our ABL Facility to $226.7 million.
Our substantial level of indebtedness requires us to dedicate a significant portion of our cash flow from operations to the payment of debt service, reducing the availability of our cash flow to fund capital expenditures, acquisitions or strategic development initiatives, and other general corporate purposes. Moreover, our level of indebtedness could have further consequences, including, increasing our vulnerability to adverse economic or industry conditions, limiting our ability to obtain additional financing in the future to enable us to react to changes in our business, or placing us at a competitive disadvantage compared to businesses in our industry that have less indebtedness.
Our substantial level of indebtedness could limit our ability to obtain additional financing on acceptable terms or at all for working capital, capital expenditures, acquisitions or strategic development initiatives, and general corporate purposes. Our liquidity needs could vary significantly and may be certain thataffected by general economic conditions, industry
trends, performance and many other factors not within our control. If we willare unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to refinance all or a portion of our existing debt. Although we were successful in financing our HBI project, we may not be able to renewobtain any such new or replace existing term supply agreementsadditional debt on favorable terms or at approximately the same volume levels, prices orall.
Any failure to comply with similar profit margins when they expire. A loss of sales to our existing customers could have a substantial negative impact on our sales, margins and profitability.
Our U.S. Iron Ore term supply agreements contain a number of price adjustment provisions, including price escalators and adjustments based on general industrial inflation rates, the price of steel and the international price of iron ore pellets, among other factors, that are out of our control and that may adjust the prices under those agreements generally on an annual basis.
Changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and the market price of our securities.
Credit rating agencies could downgrade our ratings either due to factors specific to our business, a prolonged cyclical downturncovenants in the mining industry, or macroeconomic trends (such as global or regional recessions) and trends in credit and capital markets more generally. Any decline ininstruments governing our credit ratings would likelydebt could result in an increaseevent of default which, if not cured or waived, would have a material adverse effect on us.
We may not be able to generate sufficient cash to service all of our cost of financing, including resultingdebt, and may be forced to take other actions to satisfy our obligations under our debt, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our ability to generate cash in an increase of the interest rate applicable on these senior notes, limit our access to the capital markets, significantly harmfuture and our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our debt.
We also have significant capital requirements, including interest payments to service our debt. If we incur significant losses in future periods, we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may consider, among other options, restructuring our debt; however, there can be no assurance that these options will be undertaken and, if so undertaken, whether these efforts will succeed.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, including additional secured or unsecured debt, or restructure or refinance our debt. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, making it more difficult to obtain surety bonds, letters of credit or other financing, particularly during periods in which credit markets are weak; causing a change in our credit ratings; limiting our ability to compete with companies that are not as leveraged and that may be better positioned to withstand economic downturns; and limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we compete and general economic and market conditions. These measures may not be successful and may not permit us to meet our scheduled debt service obligations.
If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or recover the carrying value of these assets or obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Further, we may need to refinance all or a portion of our debt on or before maturity, and we may not be able to refinance any of our debt on commercially reasonable terms or at all. Furthermore, additional or new financial assurances may be demanded by our vendors or regulatory agencies that we may not be able to provide on commercially reasonable terms or at all.
Any of these examples potentially could have a material adverse impact on our results of operations, hinder our abilityprofitability, shareholders' equity and capital structure. Also, if we are to refinance existing indebtedness on acceptable terms and have an adverse effect onsell a percentage of a business, there are inherent risks relating to joint venture relationships, as noted in the market price of our securities.risk factor below.
We rely on our joint venture partners in our mines to meet their payment obligations and we are subject to risks involving the acts or omissions of our joint venture partners when we are not the manager of the joint venture.partners.
We co-own and manage threeone of our fivefour operating U.S. Iron Ore mines with ArcelorMittal and one of our two Eastern Canadian Iron Ore mines with various joint venture partners that are integrated steel producers or their subsidiaries, including ArcelorMittal, U.S. Steel Canada Inc., and WISCO.Steel. We rely on our joint venture partners to make their required capital contributions and to pay for their share of the iron ore that each joint venture produces. Ourproduced. One of our U.S. Iron Ore and Eastern Canadian Iron Ore joint venture partners areis also our customers.customer. If one or moreboth of our joint venture partners fail to perform their obligations, the remaining joint venture partners, including ourselves, may be required to assume additional material obligations, including significant capital contribution, costs of environmental remediation, pension and postretirement health and life insurance benefit obligations. TheFor example, a premature closure of a mine due to the failure of a joint venture partner to perform its obligations could result in significant fixed mine-closure costs, including severance, employment legacy costs and other employment costs; reclamation and other environmental costs; and the costs of terminating long-term obligations, including energy and transportation contracts and equipment leases. For example, with respect to the Bloom Lake mine, CQIM's joint venture partner did not fully participate in calls for capital contributions, resulting in additional financial burden for CQIM. This additional burden was one of multiple factors in CQIM's decision to file for a stay under CCAA.
We cannot control the actions of our joint venture partners especially whenbecause we have a minority interest in asuch joint venture. Further, in spite of performing customary due diligence prior to entering into a joint venture, we cannot guarantee full disclosure of prior acts or omissions of the sellers or those with whom we may in the future enter into joint ventures. Such risks could have a material adverse effect on the business, results of operations or financial condition of our existing or future joint venture interests.
We may not be able to recover the carrying value when divesting assets or businesses.
When we divest assets or businesses, we may not be able to recover the carrying value of these assets, which potentially could have a material adverse impact on our results of operations, shareholders' equity and capital structure. Also, if we were to sell a percentage of a business, there are inherent risks of a joint venture relationship as noted in the risk factor above.
Our ability to collect payments from our customers depends on their creditworthiness.
Our ability to receive payment for products sold and delivered to our customers depends on the creditworthiness of our customers. With respect to our Asia Pacific business unit, payment typically is received as the products are shipped and much of the product is secured by bank letters of credit. By contrast, in our U.S. Iron Ore business unit, generally, we deliver iron ore products to our customers’ facilities in advance of payment for those products. Under this practice for our U.S. customers, title and risk of loss with respect to U.S. Iron Ore products does not pass to the customer until payment for the pellets is received; however, there is typically a period of time in which pellets, for which we have reserved title, are within our customers’ control. Where we have identified credit risk with certain customers, we have put in place alternate payment terms from time to time.
ConsolidationsConsolidation in some of the industries in which our customers operate have created larger customers. These factors have caused some customers to be less profitable and increased our exposure to credit risk. Customers in other countries may be subject to other pressures and uncertainties that may affect their ability to pay, including trade barriers, exchange controls, and local, economic and political conditions. Downturns in the economy and disruptions in the global financial markets in recent years have affected the creditworthiness of our customers from time to time. Some of our customers are highly leveraged. If economic conditions worsen or prolonged global, national or regional economic recession conditions return, it is likely to impact significantly the creditworthiness of our customers and could, in turn, increase the risk we bear on payment default for the credit we provide to our customers and could limit our ability to collect receivables. Failure to receive payment from our customers for products that we have delivered could affect adversely our results of operations, financial condition and liquidity.
Our operating expenses could increase significantly if the price of electrical power, fuel or other energy sources increases.
Our mining operations require significant use of energy. OperatingEnergy expenses, at allwhich make up approximately 20% to 25% in the aggregate of our miningoperating costs in our U.S. Iron Ore locations, are sensitive to changes in electricity prices and fuel prices, including diesel fuel and natural gas prices. These items make up approximately 25 to 30 percent in the aggregate of our operating costs in our U.S. Iron Ore locations, for example. Prices for electricity, natural gas and fuel oils can fluctuate widely with availability and demand levels from other users. During periods of peak usage, supplies of energy may be curtailed and we may not be able to purchase them at historical rates. A disruption in the transmission of energy, inadequate energy transmission infrastructure, or the termination of any of our energy supply contracts could interrupt our energy supply and affect adversely our operations. While we have some long-term contracts with electrical suppliers, we are exposed to fluctuations in energy costs that can affect our production costs. As an example, our mines in Minnesota are subject to changes in Minnesota Power’s rates, such as periodic rate changes that are reviewed and approved by the state public utilities commission in response to an application filed by Minnesota Power. We also enter into market-based pricing supply contracts for natural gas and diesel fuel for use in our operations. Those contracts expose us to price increases in energy costs, which could cause our profitability to decrease significantly.
In addition, U.S. public utilities are expected to pass through additional capital and operating cost increases to their customers related to new or pending U.S. environmental regulations that are expected to require significant capital investment and use of cleaner fuels in the future and which may impact U.S. coal-fired generation capacity. We are estimating that power rates for our electricity-intensive operations could increase above 2014 levels by up to 13 percent by 2019, representing an increase of approximately $8 per MWh by 2019 for our U.S. operations. These environmental regulations are also forcing the future closure ofOur mines in Michigan rely on electricity supplied from the Presque Isle Power Plant, inwhich is coal-fired. In 2016, we entered into a twenty-year power purchase agreement that contemplates the Upper Peninsula of Michigan which supplies electricitycapital investment by the power company to our minesconstruct two natural gas power plants in Michigan.
The availability of capital Should the power company fail to build the new power plants or experience significant construction delays, we may be limited.
We may needsubject to accessincreased operational risk from continued reliance on the capital markets to finance ongoing operations, any development of existing mining properties andpower plant or increased costs in pursuing alternatives, which could also decrease our other cash requirements. Our substantial indebtedness could make it more difficult for us to borrow money in the future and may reduce the amount of money available to finance our operations and other business activities and may have other detrimental consequences, including the following: requiring us to dedicate a substantial portion of our cash flow from operations to the payment of principal, premium, if any, and interest on our debt, which will reduce funds available for other purposes; exposing us to the risk of increased interest costs if the underlying interest rates rise on our existing credit facility or other variable rate debt; making it more difficult to obtain surety bonds, letters of credit or other financing, particularly during periods in which credit markets are weak; causing a decline in our credit ratings; limiting our ability to compete with companies that are not as leveraged and that may be better positioned to withstand economic downturns; and limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we compete and general economic and market conditions. If we further increase our indebtedness, the related risks that we now face, including those described above, could intensify. We cannot predict the general availability or accessibility of capital to finance such projects in the future.profitability.
We are subject to a variety of financial market risks.
Financial market risks include those caused by changes in the value of investments, changes in commodity prices, interest rates and foreign currency exchange rates. We have established policies and procedures to manage such risks; however, certain risks are beyond our control and our efforts to mitigate such risks may not be effective. These factors could have a material adverse effect on our results of operations.
Our existing and future indebtedness may limit cash flow available to invest in the ongoing needs of our business, which could prevent us from fulfilling our obligations under our senior notes.
As of December 31, 2014, we had an aggregate principal amount of $2,995.8 million of total debt, $308 million of which was secured (excluding outstanding letters of credit), and $290.9 million of cash on our balance sheet. Our level of indebtedness could have important consequences to you. For example, it could:
require us to dedicate a substantial portion of our cash flow from operations to the payment of debt service, reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes;
increase our vulnerability to adverse economic or industry conditions;
limit our ability to obtain additional financing in the future to enable us to react to changes in our business;
place us at a competitive disadvantage compared to businesses in our industry that have less indebtedness; or
limit our ability to pay dividends on or purchase or redeem our capital stock.
Our substantial level of indebtedness could limit our ability to obtain additional financing on acceptable terms or at all for working capital, capital expenditures and general corporate purposes. Our liquidity needs could vary significantly and may be affected by general economic conditions, industry trends, performance and many other factors not within our control. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to refinance all or a portion of our existing debt. However, we may not be able to obtain any such new or additional debt on favorable terms or at all.
Additionally, any failure to comply with covenants in the instruments governing our debt could result in an event of default which, if not cured or waived, would have a material adverse effect on us.
We may not be able to generate sufficient cash to service all of our debt, and may be forced to take other actions to satisfy our obligations under our debt, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations, including our senior notes, and to fund planned capital expenditures and expansion efforts and any strategic alliances or acquisitions we may make in the future depends on our ability to generate cash in the future and our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our debt, including our senior notes.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our debt, including our senior notes. Any refinancing of our debt could be at higher interest rates and may require us to
comply with more onerous covenants, which could further restrict our business operations. These measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Further, we may need to refinance all or a portion of our debt on or before maturity, and we cannot assure you that we will be able to refinance any of our debt on commercially reasonable terms or at all.
We are subject to bankruptcy or insolvency risks relating to the CCAA filing by the Bloom Lake Group.our former Canadian operations.
TheAs previously disclosed, the Bloom Lake Group commenced restructuring proceedings under the CCAA process in January 2015 to address the Bloom Lake Group’sGroup's immediate liquidity issues and to preserve and protect its assets for the benefit of all stakeholders while restructuring and/or sale options arewere explored. Certain obligations ofIn May 2015, the Bloom LakeWabush Group including equipment loans, were guaranteed by Cliffs.also commenced restructuring proceedings under the CCAA. It is possible that (a) as part of the CCAA process (i) claims may be asserted by or on behalf of the Bloom Lake Group or the Wabush Group or by their respective representatives against us and/or non-debtor affiliates of the Bloom Lake Group and the Wabush Group and/or (ii) our claims ofand non-debtor affiliatesaffiliate claims against the Bloom Lake Group or the Wabush Group may be challengedchallenged; and (b) creditors of the Bloom Lake Group, the Wabush Group or their respective representatives may assert claims againstwhich may impact adversely non-debtor affiliates of the Bloom Lake Group underand the guarantees discussed above.Wabush Group. While we anticipate the restructuring and/orproceeds of the sale of the Bloom Lake Group and the Wabush Group assets may mitigate these risks, to the extent that any such claims are successful, or the Bloom Lake Group’s obligations guaranteed by Cliffs are not satisfied in full by any such restructuring or sale, Cliffswe could be held liable for certain obligations.claims or be limited in the amount of recovery on account of its claims against the Bloom Lake Group and the Wabush Group.
A court or regulatory body could find that we are responsible, in whole or in part, for liabilities we transferred to third party purchasers.
As part of our strategy to focus on our U.S. Iron Ore operations, we have sold or otherwise disposed of several non-core assets, such as our North American Coal assets. Some of the transactions under which we sold or otherwise disposed of our non-core assets included provisions transferring certain liabilities to the purchasers or acquirers of those non-core assets. While we believe that all such transfers were completed properly and are legally binding, if the purchaser fails to fulfill its obligations, we may be at risk that some court or regulatory body could disagree and determine that we remain responsible for liabilities we intended to and did transfer.
Changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and the market price of our securities.
Credit rating agencies could downgrade our ratings either due to factors specific to our business, a prolonged cyclical downturn in the mining industry, or macroeconomic trends (such as global or regional recessions) and trends in credit and capital markets more generally. Any decline in our credit ratings may result in an increase to our cost of future financing and limit our access to the capital markets, which would harm our financial condition and results of operations, hinder our ability to refinance existing indebtedness on acceptable terms, have an adverse effect on the market price of our securities and may affect adversely the terms under which we purchase goods and services.
Our actual operating results may differ significantly from our guidance.
From time to time, we release guidance, including that set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Outlook” in our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q, regarding our future performance. This guidance, which consists of forward-looking statements, is prepared by our management and is qualified by, and subject to, the assumptions and the other information included in our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q. Our guidance is not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our independent registered public accounting firm nor any other independent or outside party compiles or examines the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.
Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. The principal reason that we release such data is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from the guidance. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the future that the data are forecast. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it.
IV. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in our Annual Reports on Form 10-K or our Quarterly Reports on Form 10-Q could result in actual operating results being different than the guidance, and such differences may be adverse and material.
We incur certain costs when production capacity is idled, including increased costs to resume production at idled facilities and costs to idle facilities.
Our decisions concerning which mines to operate and at what capacity levels are made based upon our customers' orders for products, the quality of and cost to mine and process the remaining ore body, as well as the capabilities and cost performance of our mines. During depressed market conditions, we may concentrate production at certain mines and not operate others in response to customer demand and as a result we will incur idle facility costs. In 2016, two of our Minnesota mines were temporarily idled for a portion of the year, and we indefinitely idled the Empire mine in Michigan in August 2016.
When we restart idled facilities, we incur certain costs to replenish inventories, prepare the previously idled facilities for operation, perform the required repair and maintenance activities and prepare employees to return to work safely and to resume production responsibilities. The amount of any such costs can be material, depending on a variety of factors, such as the period of idle time, necessary repairs and available employees, and is difficult to project.
Faced with overcapacity in the iron ore market, we may seek to rationalize assets through asset sales, temporary shutdowns, indefinite idles or closures of facilities.
Mine closures entail substantial costs. If we prematurely close one or more of our mines, our results of operations and financial condition would likely be affected adversely.
If we prematurely close any of our mines, our revenues would be reduced unless we were able to increase production at our other mines, which may not be possible. The closure of a mining operation involves significant fixed closure costs, including accelerated employment legacy costs, severance-related obligations, reclamation and other environmental costs, and the costs of terminating long-term obligations, including customer, energy and transportation contracts and equipment leases. A review of these types of potential costs is currently underway with respect to our Asia Pacific Iron Ore operations. We base our assumptions regarding the life of our mines on detailed studies we perform from time to time, but those studies and assumptions are subject to uncertainties and estimates that may not be accurate. We recognize the costs of reclaiming open pits, and shafts, stockpiles, tailings ponds, roads and other mining support areas based on the estimated mining life of our property. If we were to significantly reduce the estimated life of any of our mines, themine-closure costs would be applied to a shorter period of production, which would increase costs per ton produced and could significantly and adversely affect our results of operations and financial condition.
A North AmericanU.S. mine permanent closure could accelerate and significantly increase employment legacy costs, including our expense and funding costs for pension and other postretirement benefit obligations. A number of employees would be eligible for immediate retirement under special eligibility rules that apply upon a mine closure. All employees eligible for immediate retirement under the pension plans at the time of the permanent mine closure also could be eligible for postretirement health and life insurance benefits, thereby accelerating our obligation to provide these benefits. Certain mine closures would precipitate a pension closure liability significantly greater than an ongoing operation liability. Finally, a permanent mine closure could trigger severance-related obligations, which can equal up to sixteen weeks of pay per employee in some jurisdictions, depending on length of service. As a result, the closure of one or more of our mines could affect adversely affect our financial condition and results of operations.
At the end of March 2014, we idled our Wabush Scully mine in Newfoundland and Labrador, and in the fourth quarter of 2014, we began to implement the permanent closure plan for the mine. Additionally, we disclosed in November 2014 that we were pursuing exit options for our Bloom Lake mine and as disclosed in January 2015, active production at Bloom Lake mine has completely ceased and the mine has transitioned to "care-and-maintenance" mode. To mitigate closure costs in connection with the potential shutdown of the Bloom Lake mine, our Canadian affiliates that operate the mine commenced restructuring proceedings under the CCAA. However, there can be no assurance that we will not have any material obligations in connection with the potential shutdown of the Bloom Lake mine despite the CCAA filing.
Our sales and competitive position depend on the ability to transport our products to our customers at competitive rates and in a timely manner.
In our U.S. Iron Ore operations, disruption of the lake and ocean-going vessels and rail transportation services because of weather-related problems, including ice and winter weather conditions on the Great Lakes or St. Lawrence Seaway, climate change, strikes, lock-outs, or other events and lack of alternative transportation sources,options, could impair our ability to supply iron ore to our customers at competitive rates or in a timely manner and, thus, could adversely affect our sales, margins and profitability. Similarly, our North American Coal operations depend on international vessels and rail transportation services, as well as the availability of dock capacity, and any disruptions to those services or the lack of dock capacity could impair our ability to supply coal to our customers at competitive rates or in a timely manner and, thus, could adversely affect our sales and profitability. Further, reduced dredging and environmental changes, particularly at Great Lakes ports, could impact negatively our ability to move our iron ore and coal products because lower water levels restrict the tonnage that vessels can haul, resulting in higher freight rates.
Our Asia Pacific Iron Ore operations also are dependent upon rail and port capacity. Disruptions in rail service or availability of dock capacity could similarly impair our ability to supply iron ore to our customers, thereby adversely affecting our sales and profitability. In addition, our Asia Pacific Iron Ore operations are also in direct competition with the major world seaborne exporters of iron ore and our customers face higher transportation costs than the customers of most other Australian producers to ship our products to the Asian markets because of the location of our major shipping port on the southsouthwest coast of Australia. Further, increases in transportation costs, including volatile fuel rates, decreased availability of ocean vessels or changes in such costs relative to transportation costs incurred by our competitors could make our products less competitive, restrict our access to certain markets and have an adverse effect on our sales, margins and profitability.
Natural disasters, weather conditions, disruption of energy, unanticipated geological conditions, equipment failures, and other unexpected events may lead our customers, our suppliers or our facilities to curtail production or shut down operations.
Operating levels within the mining industry are subject to unexpected conditions and events that are beyond the industry’s control. Those events could cause industry members or their suppliers to curtail production or shut down a portion or all of their operations, which could reduce the demand for our iron ore and coal products, and could affect adversely our sales, margins and profitability.
Interruptions in production capabilities inevitably will increase our production costs and reduce our profitability. We do not have meaningful excess capacity for current production needs, and we are not able to quickly increase production or re-start production at one mine to offset an interruption in production at another mine. Additionally, re-start production costs can be even higher if required to be taken during extremely cold weather conditions.
A portion of our production costs are fixed regardless of current operating levels. As noted, our operating levels are subject to conditions beyond our control that can delay deliveries or increase the cost of mining at particular mines for varying lengths of time. These include weather conditions (for example, extreme winter weather, tornadoes, floods, and the lack of availability of process water due to drought) and natural and man-made disasters, tailings dam failures, pit wall failures, unanticipated geological conditions, including variations in the amount of rock and soil overlying the deposits of iron ore, and coal, variations in rock and other natural materials and variations in geologic conditions and ore processing changes.
The manufacturing processes that take place in our mining operations, as well as in our processing facilities, depend on critical pieces of equipment. This equipment may, on occasion, be out of service because of unanticipated failures. In addition, manyall of our mines and processing facilities have been in operation for several decades, and the equipment is aged. In the future, we may experience additional material plant shutdowns or periods of reduced production because of equipment failures. Further, remediation of any interruption in production capability may require us to make large capital expenditures that could have a negative effect on our profitability and cash flows. Our business interruption insurance would not cover all of the lost revenues associated with equipment failures. Longer-term business disruptions could result in a loss of customers, which adversely could affect our future sales levels and, therefore, our profitability.
Regarding the impact of unexpected events happening to our suppliers, many of our mines are dependent on one source for electric power and for natural gas. A significant interruption in service from our energy suppliers due to terrorism or sabotage, weather conditions, natural disasters, or any other cause can result in substantial losses that may not be fully recoverable, either from our business interruption insurance or responsible third parties.
We may not have adequate insurance coverage for some business risks.
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TableAs noted above, our operations are generally subject to a number of Contentshazards and risks, which could result in damage to, or destruction of, equipment, properties or facilities. The insurance that we maintain to address risks that are typical in our business may not provide adequate coverage. Insurance against some risks, such as liabilities for environmental pollution, tailings basin breaches, or certain hazards or interruption of certain business activities, may not be available at an economically reasonable cost, or at all. Even if available, we may self-insure where we determine it is most cost-effective to do so. As a result, accidents or other negative developments involving our mining, production or transportation activities could have a material adverse effect on our operations.
A disruption in, or failure of our information technology systems, including those related to cybersecurity, could adversely affect our business operations and financial performance.
We rely on the accuracy, capacity and security of our information technology (“IT”) systems for the operations of many of our business processes and to comply with regulatory, legal, and tax requirements. While we maintain some of our critical information technology systems, we are also dependent on third parties to provide important IT services relating to, among other things, human resources, electronic communications and certain finance functions. Despite the security measures that we have implemented, including those related to cybersecurity, our systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. Though we have controls in place, we cannot provide assurance that a cyber-attack will not occur. Furthermore, we may have little or no oversight with respect to security measures employed by third-party service providers, which may ultimately prove to be ineffective at countering threats. Failures of our IT systems, whether caused maliciously or inadvertently, may result in the disruption of our business processes, or in the unauthorized release of sensitive, confidential or otherwise protected information or result in the corruption of data, which could adversely affect our business operations and financial performance. In addition, we may be required to incur significant costs to protect against and, if required, remediate the damage caused by such disruptions or system failures in the future.
We are subject to risks involving operations and sales in multiple countries.
We supply raw materials to the global integrated steel industry with substantial assets located outside of the U.S. We conduct operations in the U.S., Canada and Australia. As such, we are subject to additional risks beyond those relating to our U.S. operations, such as fluctuations in currency exchange rates; potentially adverse tax consequences due to overlapping or differing tax structures; burdens to comply with multiple and potentially conflicting foreign laws and regulations, including export requirements, tariffs, economic sanctions and other barriers, environmental health and safety requirements, and unexpected changes in any of these laws and regulations; the imposition of duties, tariffs, import and export controls and other trade barriers impacting the seaborne iron ore and coal markets; difficulties in staffing and managing multi-national operations; political and economic instability and disruptions, including terrorist attacks; disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the Foreign Corrupt Practices Act; and uncertainties in the enforcement of legal rights and remedies in multiple jurisdictions.
With the finalization of the Organization for Economic Cooperation and Development's ("OECD"), Base Erosion and Profit Shifting study, referred to as the Actions, many OECD countries have acknowledged their intent to implement the Actions and update their local tax regulations. The extent (if any) to which countries in which we operate adopt and implement the Actions could affect our effective tax rate and our future results from non-U.S. operations.
Compliance with the laws and regulations described above or with other applicable foreign, federal, state, provincial and local laws and regulations currently in effect or that may be adopted in the future could expose us to additional risks. If we are unable to manage successfully the risks associated with operating our global business, these risks could have a material adverse effect on our business, results of operations or financial condition.
Our profitability could be affected adversely by the failure of outside contractors and/or suppliers to perform.
Asia Pacific Iron Ore uses contractors to handle many of the operational phases of theirits mining and processing operations and, therefore, we are subject to the performance of outside companies on key production areas. AWe use contractors to help complete certain capital projects, such as upgrades to our existing U.S. Iron Ore facilities, and a contractor's or supplier's failure of any of these contractorsto perform could affect adversely our production, sales, and our ability to fulfill customer requirements. Such failure to perform in a significant way would result in additional costs for us, which also could affect adversely our production rates, sales and results of operations.
Coal mining is complex due to geological characteristics of the region.
The geological characteristics of coal reserves, such as depth of overburden and coal seam thickness, make them complex and costly to mine. As mines become depleted, replacement reserves may not be available when required or, if available, may not be capable of being mined at costs comparable to those characteristic of the depleting mines, and, therefore, decisions to defer mine development activities may adversely impact our ability to substantially increase future coal production. These factors could materially adversely affect our mining operations and cost structures, which could affect adversely our sales, profitability and cash flows.
We may not be able to complete divestitures of our non-core assets at acceptable prices or at all.
As an extension of our re-focused U.S. Iron Ore strategy, we are currently in the process of streamlining our portfolio of non-core assets. Asia Pacific Iron Ore, North American Coal and Eastern Canadian Iron Ore have been identified as non-core assets and will be considered for monetization. However, we may not be able to sell any non-core assets at sales prices acceptable to us or at all. Gains or losses on the sales of, or lost operating income from, non-core assets may affect our profitability. Moreover, we may incur asset impairment charges related to divestitures that reduce our profitability. Our divestiture activities may also present financial, managerial and operational risks. Those risks include diversion of management attention from existing businesses, difficulties separating personnel and financial and other systems, adverse effects on existing business relationships with suppliers and customers and indemnities and potential disputes with the buyers. Any of these factors could affect our financial condition and results of operations.
V. DEVELOPMENT AND SUSTAINABILITY RISKS
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| V. | DEVELOPMENT AND SUSTAINABILITY RISKS |
The cost and time to implement a strategic capital project may prove to be greater than originally anticipated.
We undertake strategic capital projects, such as the HBI project, in order to enhance, expand or upgrade our mines, production capabilities and production capabilities.diversify our customer base. Our ability to achieve the anticipated increased volumes of production, revenues or otherwise realize acceptable returns on strategic capital projects that we may undertake is subject to a number of risks, many of which are beyond our control, including a variety of market (such as a volatile pricing environment for iron ore), operational, permitting and labor-related factors. Further, the cost to implement any given strategic capital project ultimately may prove to be greater and may take more time than originally anticipated. Inability to achieve the anticipated results from the implementation of our strategic capital projects, or the incurring of
unanticipated implementation costs, penalties or inability to meet contractual obligations could affect adversely our results of operations and future earnings and cash flow generation.
We continually must replace reserves depleted by production. Our explorationExploration activities may not result in additional discoveries.
Our ability to replenish our ore reserves is important to our long-term viability. Depleted ore reserves must be replaced by further delineation of existing ore bodies or by locating new deposits in order to maintain production levels over the long term. For example, in 2017 we made investments in our Tilden and Empire mines and in land in Minnesota to provide future potential ore reserves. Resource exploration and development are highly speculative in nature. Our explorationExploration projects involve many risks, require substantial expenditures and may not result in the discovery of sufficient additional mineral deposits that can be mined profitably. Once a site with mineralization is discovered, it may take several years from the initial phases of drilling until production is possible, during which time the economic feasibility of production may change. Substantial expenditures are required to establish recoverable proven and probable reserves and to construct mining and processing facilities. As a result, there is no assurance that current or future exploration programs will be successful and there is a risk that depletion of reserves will not be offset by discoveries or acquisitions.
We rely on estimates of our recoverable reserves, which is complex due to geological characteristics of the properties and the number of assumptions made.
We regularly evaluate our iron ore and coalU.S. Iron Ore reserves based on revenues and costs and update them as required in accordance with SEC Industry Guide 7 and historically, the Canadian Institute of Mining, Metallurgy & Petroleum's Definition Standards on Mineral Resources and Mineral Reserves. In addition, our7. Our Asia Pacific Iron Ore business segment has published reserves that follow the Joint Ore Reserve Code in Australia, with certain changes to our Western Australian reserve values to make them comply with SEC requirements. There are numerous uncertainties inherent in estimating quantities of reserves of our mines, including many factors beyond our control.
Estimates of reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as production capacity, effects of regulations by governmental agencies, future prices for iron ore, and coal, future industry conditions and operating costs, severance and excise taxes, development costs and costs of extraction and reclamation, all of which may vary considerably from actual results. Estimating the quantity and grade of reserves requires us to determine the size, shape and depth of our mineral bodies by analyzing geological data, such as samplings of drill holes, tunnels and other underground workings.holes. In addition to the geology assumptions of our mines, assumptions are also required to determine the economic feasibility of mining these reserves, including estimates of future commodity prices and demand, the mining methods we use, and the related costs incurred to develop and mine our reserves. For these reasons, estimates of the economically recoverable quantities of mineralized deposits attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of future net cash flows prepared by different engineers or by the same engineers at different times may vary substantially as the criteria change. Estimated ore reserves could be affected by future industry conditions, future changes in the SEC's mining property disclosure requirements, geological conditions and ongoing mine planning. Actual volume and grade of reserves recovered, production rates, revenues and expenditures with respect to our reserves will likely vary from estimates, and if such variances are material, our sales and profitability could be affected adversely.
Defects in title or loss of any leasehold interests in our properties could limit our ability to mine these properties or result in significant unanticipated costs.
A portion of our mining operations are conducted on properties we lease, license or as to which we have easements or other possessory interests, ("leased properties").which we refer to as "leased properties." Consistent with industry practice, title to most of these leased properties and mineral rights are not usually verified until we make a commitment to develop a property, which may not occur until after we have obtained necessary permits and completed exploration of the leased property. In some cases, title with respect to leased properties is not verified at all because we instead rely on title information or representations and warranties provided by lessors or grantors. We do not maintain title insurance on our owned or leased mining properties. A title defect or the loss of any lease, license or easement for any leased mining property could affect adversely affect our ability to mine theany associated reserves. In addition, from time to time the rights of third parties for competing uses of adjacent, overlying, or underlying lands such as for roads, easements and public facilities may affect our ability to operate as planned if our title is not superior or arrangements cannot be negotiated.
Any challenge to our title could delay the exploration and development of some reserves, deposits or surface rights, cause us to incur unanticipated costs and could ultimately result in the loss of some or all of our interest in those reserves or surface rights. In the event we lose reserves, deposits or surface rights, we may have to shut down or significantly alter the sequence of our mining operations, which may affect adversely affect our future production, revenues and cash flows. Additionally, if we lose any leasehold interests relating to any of our preparationpellet plants or loadout facilities, we may need to find an alternative location to process our iron ore or coal and load it for delivery to customers, which could
result in significant unanticipated costs. Finally, we could incur significant liability if we inadvertently mine on property we do not own or lease.
In order to continue to foster growth in our business and maintain stability of our earnings, we must maintain our social license to operate with our stakeholders.
As a mining company, maintaining a strong reputation and consistent operational and safety history is vital in order to continue to foster growth and maintain stability in our earnings. As sustainability expectations increase and regulatory requirements continue to evolve, maintaining our social license to operate becomes increasingly important. We strive to incorporate social license expectations in our ERM program. Our ability to maintain our reputation and strong operating history could be threatened, including by circumstances outside of our control.control, such as disasters caused or suffered by other mining companies. If we are not able to respond effectively to these and other challenges to our social license to operate, our reputation could be damaged significantly. Damage to our reputation could affect adversely our operations and ability to foster growth in our Company.company.
Estimates and timelines relating to new development and expansion projects are uncertain and we may incur higher costs and lower economic returns than estimated.
MineMining industry development and expansion projects projects typically require a number of years and significant expenditures during the development or expansion phase before production is possible. Such projects could experience unexpected problems and delays during development, construction and mine start-up or expansion.start-up.
Our decision to develop a project typically is based on the results of feasibility studies, which estimate the anticipated economic returns of a project. The actual project profitability or economic feasibility may differ from such estimates as a result of any of the following factors, among others: changes in tonnage, grades and metallurgical characteristics of ore or other raw materials to be mined and processed; estimated future prices of the relevant ore;product; changes in customer demand; higher construction and infrastructure costs; the quality of the data on which engineering assumptions were made; higher production costs; adverse geotechnical conditions; availability of adequate labor force; availability and cost of water and power;energy; availability and cost of transportation; fluctuations in inflation and currency exchange rates; availability and terms of financing; delays in obtaining environmental or other government permits or changes in laws and regulations including environmental laws and regulations; weather or severe climate impacts; and potential delays relating to social and community issues.
Our future development activities may not result inThe production of hot briquetted iron is a capital-intensive business and our ongoing efforts with respect to our HBI project will require the expansioncommitment of substantial resources. Any unanticipated costs or replacement of current productiondelays associated with new production, or one or more of these new production sites or facilities may be less profitable than currently anticipated, or may not be profitable at all, any of whichour HBI project could have a material adverse effect on our financial condition or results of operations.
Our ongoing efforts with respect to our HBI project require the commitment of substantial resources for operating expenses and capital expenditures. We currently expect to incur total capital expenditures through 2020 on the HBI project of approximately $700 million on the development of the HBI production plant in Toledo, Ohio and $80 million for upgrades at the Northshore plant to enable it to produce significantly increased levels of DR-grade pellets that could be used as feedstock for the HBI production plant and/or sold commercially. Each of these estimates are exclusive of construction-related contingencies and capitalized interest. Our estimated expenses may increase as personnel and equipment associated with advancing development and commercial production are added. The progress of our HBI project and the amounts and timing of expenditures will depend in part on the following:
•receiving and maintaining required federal, state and local permits;
completing infrastructure and construction work and the completion of commissioning and integration of all of the systems comprising our HBI production plant;
•negotiating sales marginscontracts for our planned production;
•the execution of any joint venture agreements or similar arrangements with strategic partners; and
•other factors, many of which are beyond our control.
Most of these activities require significant lead times and must be advanced concurrently.
Any unanticipated costs or other delays associated with our HBI project could have a material adverse effect on our financial condition or results of operations and could require us to seek additional capital, which may not be available on commercially acceptable terms or at all.
Our ability to realize the benefits of any potential acquisitions is uncertain.
Should we determine to pursue any acquisitions, the success of the same is subject to risks and uncertainties, including our ability to realize operating efficiencies expected from an acquisition; the size or quality of the mineral potential; delays in realizing the benefits of an acquisition; difficulties in retaining key employees, customers or suppliers of the acquired business; the risks associated with the assumption of contingent or undisclosed liabilities of acquisition targets; the impact of changes to our allocation of purchase price; and the ability to generate future cash flows.flows or the availability of financing.
VI. HUMAN CAPITAL RISKSMoreover, any acquisition opportunities we pursue could affect materially our liquidity and capital resources and may require us to incur indebtedness, seek equity capital or both. Future acquisitions could also result in us assuming more long-term liabilities relative to the value of the acquired assets than we may have assumed in previous acquisitions.
Our profitability could be affected adversely if we fail to maintain satisfactory labor relations.
Production in our mines is dependent upon the efforts of our employees. We are party to labor agreements with various labor unions that represent employees at our operations. Such labor agreements are negotiated periodically, and, therefore, we are subject to the risk that these agreements may not be able to be renewed on reasonably satisfactory terms. It is difficult to predict what issues may arise as part of the collective bargaining process, and whether negotiations concerning these issues will be successful. Due to union activities or other employee actions, we could experience labor disputes, work stoppages, or other disruptions in our production of coal and iron ore that could affect us adversely. The USW represents all hourlylabor employees at our U.S. Iron Ore and Eastern Canadian Iron Ore operations owned and/or managed by Cliffs or its subsidiary companies except for Northshore. Our labor agreements with the USW at four of our U.S. Iron Ore operations expirewere ratified in September 2015. Since this is an expiration year2016 and extend for our labor agreements, there is an increased probabilitya three-year term, effective as of a disruption at our U.S. Iron Ore operations inOctober 1, 2015.
If we enter into a new labor agreement with any union that significantly increases our labor costs relative to our competitors or fail to come to an agreement upon expiry, our ability to compete may be materially and adversely affected.
We may encounter labor shortages for critical operational positions, which could affect adversely our ability to produce our products.
We are predicting a long-term shortage of skilled workers for the mining industry and competition for the available workers limits our ability to attract and retain employees. Additionally, at our U.S. mining locations, many of our mining operational employees are approaching retirement age. As these experienced employees retire, we may have difficulty replacing them at competitive wages.
Our expenditures for post-retirement benefit and pension obligations could be materially higher than we have predicted if our underlying assumptions differ from actual outcomes, there are mine closures, or our joint venture partners fail to perform their obligations that relate to employee pension plans.
We provide defined benefit pension plans and OPEB to certain eligible union and non-union employees in North America,the U.S., including our share of expense and funding obligations with respect to our unconsolidated ventures.joint venture. Our pension expenseand OPEB expenses and our required contributions to our pension and OPEB plans are affected directly by the value of plan assets, the projected and actual rate of return on plan assets, and the actuarial assumptions we use to measure our defined benefit pension plan obligations, including the rate at which future obligations are discounted.
We cannot predict whether changing market or economic conditions, regulatory changes or other factors will increase our pension and OPEB expenses or our funding obligations, diverting funds we would otherwise apply to other uses.
Signatories to labor agreements with the UMWA have participated for decades in the 1974 PP. The 1974 PP has been underfunded for a number of years and has a current total underfunded liability in excess of $4.3 billion. Our Pinnacle and Oak Grove mines are signatories to labor agreements with the UMWA, making them participants in the 1974 PP. If Pinnacle or Oak Grove were to withdraw from the 1974 PP or if a mass withdrawal were to occur, we would become obligated to satisfy the withdrawal liability owed to the 1974 PP.
We have calculated our unfunded pension and OPEB obligations based on a number of assumptions.assumptions, including our joint venture partners satisfying their funding obligations. If our assumptions do not materialize as expected, cash expenditures and costs that we incur could be materially higher. Moreover, we cannot be certain that regulatory changes will not increase our obligations to provide these or additional benefits. These obligations also may increase substantially in the event of adverse medical cost trends or unexpected rates of early retirement, particularly for bargaining unit retirees.
We depend on our senior management team and other key employees, and the loss of these employees could adversely affect our business.
Our success depends in part on our ability to attract and motivate our senior management and key employees. Achieving this objective may be difficult due to a variety of factors, including fluctuations in the global economic and industry conditions, competitors’ hiring practices, cost reduction activities, and the effectiveness of our compensation programs. Competition for qualified personnel can be intense. We must continue to recruit, retain, and motivate our senior management and key personnel in order to maintain our business and support our projects. A loss of senior management and key personnel could prevent us from capitalizing on business opportunities, and our operating results could be adversely affected.
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| Item 1B. | Unresolved Staff Comments |
We have no unresolved comments from the SEC.
The following map shows the locations of our operations and offices as of December 31, 2014:2017:
General Information about the Mines
All of our iron ore mining operations are open-pit mines. Additional pit development is underway as required by long-range mine plans. At our U.S. Iron Ore and Asia Pacific Iron Ore mines, drilling programs are conducted periodically to collect modeling data and for the purpose of refining guidance related to ongoing operations.
Our North American Coal operations consist of underground mines. Drilling programs are conducted periodically for the purpose of refining guidance related to ongoing operations.
Geologic models are developed for all mines to define the major ore and waste rock types. Computerized block models for iron ore and stratigraphic models for coal are constructed that include all relevant geologic and metallurgical data. These are used to generate grade and tonnage estimates, followed by detailed mine design and life of mine operating schedules.
U.S. Iron Ore
The following map shows the locations of our U.S. Iron Ore operations as of December 31, 2014:operations:
We directlycurrently own or indirectly own and operate interests in five U.S. Iron Oreco-own four operating iron ore mines located in Michigan and Minnesota, from which weas well as one indefinitely idled mine in Michigan. We produced 22.418.8 million, 20.316.0 million and 22.019.3 million long tons of iron ore pellets in 2014, 20132017, 2016 and 2012,2015, respectively, at those mines for our account. We produced 7.36.7 million, 6.97.4 million and 7.56.8 million long tons, respectively, on behalf of thecurrent and previous steel company partners of the mines.
Our U.S. Iron Ore mines produce from deposits located within the Biwabik and Negaunee Iron Formation, which are classified as Lake Superior type iron formations that formed under similar sedimentary conditions in shallow marine basins approximately two billion years ago. Magnetite and hematite are the predominant iron oxide ore minerals present, with lesser amounts of goethite and limonite. Quartz is the predominant waste mineral present, with lesser amounts of other chiefly iron bearing silicate and carbonate minerals. The ore minerals liberate from the waste minerals upon fine grinding.
| | | Mine | | Cliffs Ownership | | Infrastructure | | Mineralization | | Operating Since | | Current Annual Capacity1,2 | | 2014 Production2,3 | | Mineral Owned | | Rights Leased | | Cliffs Ownership | | Infrastructure | | Mineralization | | Operating Since | | Current Annual Capacity1,2 | | 2017 Production1,2 | | Mineral Owned | | Rights Leased |
| Empire | | 79% | | Mine, Concentrator, Pelletizer | | Magnetite | | 1963 | | 5.5 | | 4.3 | | 53% | | 47% | |
| Tilden | | 85% | | Mine, Concentrator, Pelletizer, Railroad | | Hematite & Magnetite | | 1974 | | 8.0 | | 7.6 | | 100% | | —% | |
Empire3,4 | | | 100% | | Mine, Concentrator, Pelletizer | | Magnetite | | 1963 | | * | | — | | 53% | | 47% |
Tilden4 | | | 100% | | Mine, Concentrator, Pelletizer, Railroad | | Hematite & Magnetite | | 1974 | | 8.0 | | 7.7 | | 100% | | —% |
| Hibbing | | 23% | | Mine, Concentrator, Pelletizer | | Magnetite | | 1976 | | 8.0 | | 7.7 | | 3% | | 97% | | 23% | | Mine, Concentrator, Pelletizer | | Magnetite | | 1976 | | 8.0 | | 7.7 | | 3% | | 97% |
| Northshore | | 100% | | Mine, Concentrator, Pelletizer, Railroad | | Magnetite | | 1990 | | 6.0 | | 5.2 | | —% | | 100% | | 100% | | Mine, Concentrator, Pelletizer, Railroad | | Magnetite | | 1990 | | 6.0 | | 5.3 | | —% | | 100% |
| United Taconite | | 100% | | Mine, Concentrator, Pelletizer | | Magnetite | | 1965 | | 5.4 | | 4.9 | | —% | | 100% | | 100% | | Mine, Concentrator, Pelletizer | | Magnetite | | 1965 | | 5.4 | | 4.8 | | —% | | 100% |
1 Annual capacity is reported on a wet basis in millions of long tons, equivalent to 2,240 pounds. | |
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1 Reported on a wet basis in millions of long tons, equivalent to 2,240 pounds. | | 1 Reported on a wet basis in millions of long tons, equivalent to 2,240 pounds. |
2 Figures reported on 100% basis. | 2 Figures reported on 100% basis. | 2 Figures reported on 100% basis. |
3 2014 Production from Empire includes 2.4 million long tons tolled to Tilden. | |
3 Empire was indefinitely idled beginning on August 3, 2016. | | 3 Empire was indefinitely idled beginning on August 3, 2016. |
4 During 2017, our ownership interest in Tilden and Empire increased to 100%. | | 4 During 2017, our ownership interest in Tilden and Empire increased to 100%. |
| * Historically, Empire had an annual capacity of 5.5 million long tons; currently indefinitely idled. | | * Historically, Empire had an annual capacity of 5.5 million long tons; currently indefinitely idled. |
Empire Mine
The Empire mine is located on the Marquette Iron Range in Michigan’s Upper Peninsula approximately 15 miles southwest of Marquette, Michigan. TheAs a result of the indefinite idle that began in August 2016, the Empire mine has produced between 3.0had no production in 2017 compared to its highest annual production over the last five years of 4.3 million and 4.9 millionlong tons of iron ore pellets annually over the past five years, of which between 1.3 million and 2.4 million tons annually over the past five years were tolled to Tilden mine.pellets.
We own 79 percent of Empire and a subsidiary of ArcelorMittal USA has retained the remaining 21 percentDuring 2017, our ownership interest in Empire with limited rights and obligations, which it has a unilateral rightincreased to put100% as we reached an agreement to us at any time. This right has not been exercised. Eachdistribute the noncontrolling interest net assets to ArcelorMittal, in exchange for its interest in Empire. Prior to the indefinite idle, each partner takestook its share of production pro rata; however, provisions in the partnership agreement allowallowed additional or reduced production to be delivered under certain circumstances. We own directly
approximately one-half ofPrior to the remaining ore reserves at the Empire mine and lease them to Empire. A subsidiary of ours leases the balance of the Empire reserves from other owners of such reserves and subleases them to Empire. Operations consistindefinite idle, operations consisted of an open pit truck and shovel mine, a concentrator that utilizes single stage crushing, AG mills, magnetic separation and floatation to produce a magnetite concentrate that iswas then supplied to the on-site pellet plant. From the site, pellets were transported by CN rail to a ship loading port at Escanaba, Michigan, operated by CN.
Tilden Mine
The Tilden mine is located on the Marquette Iron Range in Michigan’s Upper Peninsula approximately five miles south of Ishpeming, Michigan. Over the past five years, the Tilden mine has produced between 7.5 million and 7.87.7 million long tons of iron ore pellets annually. We own 85 percent of Tilden, withDuring 2017, we acquired the remaining minority15% equity interest in Tilden owned by a subsidiaryU.S. Steel. With the closing of U.S. Steel Canada Inc. Each partner takes its sharethis transaction, we now have 100% ownership of production pro rata; however, provisions in the partnership agreement allow additional or reduced production to be delivered under certain circumstances.mine. We own all of the ore reserves at the Tilden mine and lease them to Tilden.mine. Operations consist of an open pit truck and shovel mine, a concentrator that utilizes single stage crushing, AG mills, magnetite separation and floatation to produce hematite and magneticmagnetite concentrates that are then supplied to the on-site pellet plant.
The Empire and Tilden mines From the site, pellets are located adjacenttransported by our LS&I rail to each other. The logistical benefits include a consolidated transportation system, more efficient employee and equipment operating schedules, reduction in redundant facilities and workforce and best practices sharing. Two railroads, one of which is wholly owned by us, link the Empire and Tilden mines with Lake Michigan at theship loading port of Escanaba,at Marquette, Michigan, and with the Lake Superior loading port of Marquette, Michigan.operated by LS&I.
Hibbing Mine
The Hibbing mine is located in the center of Minnesota’s Mesabi Iron Range and is approximately ten miles north of Hibbing, Minnesota, and five miles west of Chisholm, Minnesota. Over the past five years, the Hibbing mine has produced between 5.97.7 million and 8.18.2 million long tons of iron ore pellets annually. We own 23 percent23% of Hibbing, a subsidiary of ArcelorMittal has a 62.3 percent62.3% interest and a subsidiary of U.S. Steel has a 14.7 percent14.7% interest. Each partner takes its share of production pro rata; however, provisions in the joint venture agreement allow additional or reduced production to be delivered under certain circumstances. Mining is conducted on multiple mineral leases having varying expiration dates. Mining leases routinely are renegotiated and renewed as they approach their respective expiration dates. Hibbing operations consist of an open pit truck and shovel mine, a concentrator that utilizes single stage crushing, AG mills and magnetic separation to produce a magnetite concentrate, which is then delivered to an on-site pellet plant. From the site, pellets are transported by BNSF rail to a ship loading port at Superior, Wisconsin, operated by BNSF.
Northshore Mine
The Northshore mine is located in northeastern Minnesota, approximately two miles south of Babbitt, Minnesota, on the northeastern end of the Mesabi Iron Range. Northshore’s processing facilities are located in Silver Bay, Minnesota, near Lake Superior. Crude ore is shipped by a wholly owned railroad from the mine to the processing and dock facilities at Silver Bay. Over the past five years, the Northshore mine has produced between 3.93.2 million and 5.85.3 million long tons of iron ore pellets annually. TwoWe ran a three furnace operation throughout 2015 until the complete idle of the four production lines at Northshore were idled beginning January 5, 2013 but the idled lines reopened during the first quarter of 2014. One of themine in late November 2015 through May 2016. We restarted all four furnaces in May 2016. The temporary idle was a result of historic levels of steel imports into the U.S. and reduced demand from our steel-producing customers. Throughout 2017 the Northshore pellet plant became idled in January 2015 and is expected to remain idled throughout the year. mine was substantially at full production levels.
The Northshore mine began production under our management and ownership onin October 1, 1994. We own 100 percent100% of the mine. Mining is conducted on multiple mineral leases having varying expiration dates. Mining leases routinely are renegotiated and renewed as they approach their respective expiration dates. Northshore operations consist of an open pit truck and shovel mine where two stages of crushing occur before the ore is transported along a wholly owned 47-mile rail line to the plant site in Silver Bay. At the plant site, two additional stages of crushing occur before the ore is sent to the concentrator. The concentrator utilizes rod mills and magnetic separation to produce a magnetite concentrate, which is delivered to the pellet plant located on-site. The plant site has its own ship loading port located on Lake Superior.
United Taconite Mine
The United Taconite mine is located on Minnesota’s Mesabi Iron Range in and around the city of Eveleth, Minnesota. The United Taconite concentrator and pelletizing facilities are located ten miles south of the mine, near the town of Forbes, Minnesota. Over the past five years, the United Taconite mine has produced between 4.91.5 million and 5.45.2 million long tons of iron ore pellets annually. United Taconite was temporarily idled beginning in August 2015. We restarted the United Taconite operation in August 2016. The temporary idle was a result of historic levels of steel imports into the U.S. and reduced demand from our steel-producing customers. Throughout 2017 the United Taconite mine was substantially at full production levels.
We own 100 percent100% of the United Taconite mine. Mining is conducted on multiple mineral leases having varying expiration dates. Mining leases routinely are renegotiated and renewed as they approach their respective expiration dates. United Taconite operations consist of an open pit truck and shovel mine where two stages of crushing occur before the ore is transported by rail, operated by CN, to the plant site located ten miles to the south.site. At the plant site an additional stage of crushing occurs before the ore is sent to the concentrator. The concentrator utilizes rod mills and magnetic separation to produce a magnetite concentrate, which is delivered to the pellet plant. From the site, pellets are transported by CN rail to a ship loading port at Duluth, Minnesota, operated by CN.
Asia Pacific Iron Ore
The following map shows the location of our Asia Pacific Iron Ore operation as of December 31, 2014:operation:
In Australia, we own and operate the Koolyanobbing operations and owned and operated a 50 percent interest in the Cockatoo Island iron ore mine until we sold it in September 2012.operations. We produced 11.410.1 million, 11.8 million and 11.7 million metric tons 11.1 million metric tons and 11.3 million metric tons in 2014, 2013 and 2012, respectively. The 2012 production tons include tons produced at the Koolyanobbing operations and the Cockatoo Islandof iron ore mine.products in 2017, 2016 and 2015, respectively.
The mineralization at the Koolyanobbing operations is predominantly hematite and goethite replacements in greenstone-hosted banded iron formations. Individual deposits tend to be small with complex ore-waste contact relationships. The reserves at the Koolyanobbing operations are derived from 10 separate mineral deposits distributed over a 70 mile operating radius.
| | | Mine | | Cliffs Ownership | | Infrastructure | | Mineralization | | Operating Since | | Current Annual Capacity1 | | 2014 Production | | Mineral Owned | | Rights Leased | | Cliffs Ownership | | Infrastructure | | Mineralization | | Operating Since | | Current Annual Capacity1 | | 2017 Production1 | | Mineral Owned | | Rights Leased |
| Koolyanobbing | | 100% | | Mine, Road Haulage, Crushing- Screening Plant | | Hematite & Goethite | | 1994 | | 11.0 | | 11.4 | | —% | | 100% | | 100% | | Mine, Road Haulage, Crushing- Screening Plant | | Hematite & Goethite | | 1994 | | 11.0 | | 10.1 | | —% | | 100% |
1 Annual capacity is reported on a wet basis in millions of metric tons, equivalent to 2,205 pounds. | |
| | | |
1 Reported on a wet basis in millions of metric tons, equivalent to 2,205 pounds. | | 1 Reported on a wet basis in millions of metric tons, equivalent to 2,205 pounds. |
Koolyanobbing
The Koolyanobbing operations are located 250 miles east of Perth and approximately 30 miles northeast of the town of Southern Cross. Koolyanobbing produces lump and fines iron ore. Mining is conducted on multiple mineral leases having varying expiration dates. Mining leases routinely are renewed as they approach their respective expiration dates. In 2011, a significant permitting milestone was achieved with the granting of regulatory approvals necessary to develop above the water table at Windarling's W1 deposit. In 2013, environmental approvals were obtained for deepening of the Windarling W1 pit and deepening of the Koolyanobbing A/B/C pits.
Over the past five years, the Koolyanobbing operation has produced between 8.210.1 million and 11.411.8 million metric tons of iron ore products annually. The expansion project at Koolyanobbing increasing annual capacity to 11 million metric tonsDuring 2017, ore material was completed in 2012. Ore material is sourced from nineten separate open pit mines and was delivered by typical production trucks or road trains to a crushing and screening facility located at Koolyanobbing. All of the ore from the Koolyanobbing operations is transported by rail to the Port of Esperance, 360 miles to the south, for shipment to Asian customers.
North American Coal
The following map shows the locations of our North American Coal operations as of December 31, 2014:
Throughout 2014, we directly owned and operated three North American coal mining complexes from which we produced a total of 7.5 million, 7.2 million and 6.4 million tons of coal in 2014, 2013 and 2012, respectively. We no longer own CLCC as the sale of the CLCC assets was completed on December 31, 2014, and therefore CLCC is not denoted on the map above. The production tons include 2.5 million tons, 2.1 million tons and 2.2 million tons of coal produced by CLCC in 2014, 2013 and 2012, respectively. Our coal production at each mine is shipped within the U.S. by rail or barge. Coal for international customers is shipped through the ports of Mobile, Alabama; Norfolk, Virginia; and New Orleans, Louisiana.
Coal seams mined at all of our North American Coal operations are Pennsylvanian Age and derived from the Pocahontas 3 and 4 seams at the Pinnacle Complex and the Blue Creek Seam at Oak Grove, which produce high quality, low ash metallurgical products.
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| | | | | | | | | | | | | | | | |
| Mine | | Cliffs Ownership | | Infrastructure | | Primary Coal Type | | Operating Since | | Current Annual Capacity1 | | 2014 Production | | Mineral Owned | | Rights Leased |
| Pinnacle Complex | | 100% | | U/G Mine, Preparation Plant, Load-out | | Low-Volatile Metallurgical | | 1969 | | 4.0 | | 2.7 | | —% | | 100% |
| Oak Grove | | 100% | | U/G Mine, Preparation Plant, Load-out | | Low-Volatile Metallurgical | | 1972 | | 2.5 | | 2.3 | | —% | | 100% |
1 Annual capacity is on a wet basis in millions of short tons, equivalent to 2,000 pounds. |
Pinnacle Complex
The Pinnacle Complex includes the Pinnacle and Green Ridge mines and is located approximately 30 miles southwest of Beckley, West Virginia. The Pinnacle mine has been in operation since 1969. Over the past five years, the Pinnacle mine has produced between 1.1 million and 2.8 million tons of coal annually. The Green Ridge mines became operational in 2004 and have ranged from no production to 0.1 million tons of coal annually in the last five years. In February 2010, the Green Ridge No. 1 mine was closed permanently due to exhaustion of the economic reserves at the mine. In addition, the Green Ridge No. 2 mine was idled in January 2012. Pinnacle utilizes continuous miners and a longwall plow system; Green Ridge utilizes only continuous miners. Both facilities share preparation, processing and load-out facilities.
Oak Grove
The Oak Grove mine is located approximately 25 miles southwest of Birmingham, Alabama. The mine has been in operation since 1972. Over the past five years, the Oak Grove mine has produced between 1.0 million and 2.3 million tons of coal annually. In 2011, a new shaft and support facilities were commissioned in order to reduce the transport time for supplies and personnel to the working face. The previous shaft still is utilized in a support role. Oak Grove utilizes a long wall shearer with continuous miners. Preparation, processing and rail load-out facilities are located on-site. The preparation plant at Oak Grove incurred significant tornado damage during 2011. The plant rebuild included new equipment and improvements to the process design that enhanced the performance of the plant, which returned to normal operating capacity in January 2012.
Eastern Canadian Iron Ore
The following map shows the locations of our Eastern Canadian Iron Ore operations as of December 31, 2014:
We own interests in two non-operating iron ore mines in the Canadian Provinces of Québec and Newfoundland and Labrador from which we had been producing iron ore concentrate through December 2014 and produced iron ore pellets through June 2013. We produced 6.2 million, 8.7 million and 8.5 million metric tons of iron ore product in 2014, 2013 and 2012, respectively, from these two mines. In May 2011, we acquired Consolidated Thompson along with its 75 percent interest in the Bloom Lake property. In the fourth quarter of 2013, our interest in Bloom Lake increased by an aggregate of 7.8 percent, bringing our interest to 82.8 percent in the Bloom Lake property.
Our Eastern Canadian mines had been producing from deposits located within the area known as the Labrador Trough and are composed of iron formations, which are classified as Lake Superior type. Lake Superior type iron formations consist of banded sedimentary rocks that formed under similar conditions in shallow marine basins approximately two billion years ago. The Labrador Trough region experienced considerable metamorphism and folding of the original iron deposits. Magnetite and hematite are the predominant iron oxide ore minerals present, with lesser amounts of goethite and limonite. Quartz is the predominant waste mineral present, with lesser amounts of other chiefly iron bearing silicate minerals. The ore minerals liberate from the waste minerals upon fine grinding.
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| | | | | | | | | | | | | | | | |
| Mine | | Cliffs Ownership | | Infrastructure | | Mineralization | | Operating Since | | Current Annual Capacity1, 2 | | 2014 Production2 | | Mineral Owned | | Rights Leased |
Wabush3 | | 100% | | Mine, Concentrator, Pelletizer, Railroad | | Hematite | | 1965 | | 5.6 | | 0.3 | | —% | | 100% |
Bloom Lake4 | | 82.8% | | Mine, Concentrator, Railroad | | Hematite | | 2010 | | 7.2 | | 5.9 | | —% | | 100% |
1 Annual capacity is reported on a wet basis in millions of metric tons, equivalent to 2,205 pounds. |
2 Figures reported on 100% basis. |
3 At the end of March 2014, we idled our Wabush Scully mine in Newfoundland and Labrador and began to implement the permanent closure plan for the mine. |
4 In December 2014, iron ore production at the Bloom Lake mine was suspended and the Bloom Lake mine was placed in ‘‘care-and-maintenance’’ mode. |
Wabush Mine
The Wabush mine has been in operation since 1965. Over the past five years, the Wabush mine has produced between 0.3 million and 3.9 million metric tons of iron ore pellets and concentrate annually. Mining was conducted on several mineral leases having varying expiration dates. Mining leases are routinely renegotiated and renewed as they approach their respective expiration dates. The Wabush mine and concentrator are located in Wabush, Newfoundland and Labrador, and the pelletizing operations and dock facility are located in Pointe Noire, Québec. At the mine, operations consisted of an open pit truck and shovel mine, a concentrator that utilizes single stage crushing, AG mills and gravity separation to produce an iron concentrate. Concentrates had been shipped by rail 300 miles to Pointe Noire where they were pelletized through June 2013 for shipment via vessel within Canada, to the U.S. and other international destinations. Concentrates had been shipped directly from Pointe Noire for sinter feed.
As disclosed in the first quarter of 2014, at the end of March 2014, we idled our Wabush Scully mine in Newfoundland and Labrador and began to implement the permanent closure plan for the mine in October 2014. The idle and move to ultimate closure was driven by the unsustainable high cost structure. The pellet plant operations at Pointe Noire had been idled since the second quarter of 2013.
Bloom Lake Mine
The Bloom Lake mine and concentrator are located approximately nine miles southwest of Fermont, Québec. As previously mentioned, our acquisition of Consolidated Thompson in May 2011 included a 75 percent majority ownership in the Bloom Lake operation. During the fourth quarter of 2013, CQIM's interest in the property increased by an aggregate of 7.8 percent to 82.8 percent after CQIM paid both its own and WISCO’s proportionate shares of the cash call for the first half of 2013. As a result, WISCO's interest was diluted to 17.2 percent. Since the acquisition in May 2011, the Bloom Lake mine has produced between 3.5 million and 5.9 million metric tons of iron ore concentrate annually. Phase I of the Bloom Lake mine was commissioned in March 2010, and consisted of an open pit truck and shovel mine, a concentrator that utilizes single stage crushing, an AG mill and gravity separation to produce an iron concentrate. From the site, concentrate is transported 320 miles by rail to a ship loading port in Pointe Noire, Québec.
The Bloom Lake mine assets were included in the CCAA filing made in January 2015. For more information see "Eastern Canadian Iron Ore" in Item 1 - Business.
Advanced Exploration and Development Properties
The following map shows the locations of our advanced exploration and development properties as of December 31, 2014:
We have several advanced exploration projects located in the Canadian provinces of British Columbia, Ontario and Québec in different stages of evaluation at this time. Work historically completed on these properties includes geological mapping, drilling and sampling programs, and initial and advance stage engineering studies. In alignment with our capital allocation strategy, we anticipate minimal levels of exploration spending to continue in 2015 and beyond.
Chromite Project
Cliffs Chromite Ontario's primary assets are situated in the Ring of Fire area, James Bay lowlands, of northern Ontario. These chromite properties are located approximately 155 miles north of the town of Nakina (on the CN railroad mainline) and about 50 miles east of the First Nations community of Webequie. We have a controlling position in three chromite deposits that occur in close proximity to each other: a 100 percent interest in each of the Black Label and Black Thor chromite deposits and a 70 percent interest in the Big Daddy chromite deposit. KWG Resources Inc. owns the remaining 30 percent. We have completed a prefeasibility study on the Black Thor deposit, the largest of the three deposits. On November 20, 2013, we suspended indefinitely our Chromite Project in Northern Ontario. Earlier in 2013, prior to the indefinite suspension of our Chromite Project, we suspended the environmental assessment activities because of pending issues impeding the progress of the project. The Chromite Project remained suspended throughout 2014. Given the uncertain timeline and risks associated with the development of necessary infrastructure to bring this project online, we do not expect to allocate any significant additional capital to the project, and are currently seeking to exit the Chromite Project through a possible sale of all or part of the assets or holding subsidiaries.
These chromite deposits are orthomagmatic stratiform deposits of unusual thickness and size. Mineralization consists of chromite crystals [(Fe,Mg) (Cr,Al,Fe)2O4] ranging from massive chromite bands to interbedded and disseminated chromite.
Decar Property
The Decar Property is located 56 miles northwest of Fort St. James, British Columbia, Canada and consists of 60 mineral claims covering 95 square miles. We own a 60 percent interest in the Decar Property and First Point Minerals Corp. owns the remaining 40 percent. In 2012, 2011 and 2010, we performed exploration activities on the property and in 2013 completed a scoping study to further evaluate the potential economics and viability of an operation producing a high-grade nickel concentrate that could be marketable to various end users. In 2013, our interest in the property increased from 51 percent to 60 percent as a result of completing the scoping study in accordance with the 2009 option agreement between Cliffs and First Point Minerals. Our Decar project program for 2014 has consisted of basic ongoing activity related to First Nations engagement and baseline environmental studies completed early in 2014. During 2014, we limited spending on the Decar Property. Given the uncertain timeline and risks associated with the development of necessary infrastructure to bring this project online, we do not expect to allocate any significant additional capital to the project.
The mineralization consists of the nickel-iron alloy awaruite (Ni2-3Fe). Awaruite is disseminated in serpentinized peridotite; it occurs as relatively coarse grains between 50 to 400 µm in size. Awaruite has been observed throughout the entire extent of the peridotite but four zones of stronger mineralization have been identified. The four zones are the Baptiste, Sidney, Target B and Van targets. Prior to suspending spending on the Decar Property, exploration programs,
resource definition drilling and engineering studies associated with the scoping study had focused on the Baptiste prospect.
Labrador Trough South
The Labrador Trough South property is located approximately 150 miles north of Sept-Iles, Québec and 30 miles southwest of the town of Fermont, Québec. Provincial highway 389 crosses the south and east sides of the property and provides year-round access. The property consists of a total of 636 non-contiguous claims covering roughly 130 square miles. Several areas containing iron mineralization have been further defined utilizing aerial geophysics, outcrop mapping and diamond drilling. These areas are known as: Lamêlée, Peppler Lake, Hobdad, Lac Jean and Faber. To date most of the exploration efforts focused on the first three areas. Cliffs acquired 100 percent ownership of the claims as part of the Consolidated Thompson acquisition in 2011. During 2014, we limited spending on the Labrador Trough South property. Given the uncertain timeline and risks associated with the development of necessary infrastructure to bring this project online, we do not expect to allocate any significant additional capital to the project. The Labrador Trough South property was included in the CCAA filing made in January 2015.
The Labrador Trough South property is situated in the Knob Lake Group of sedimentary rocks including Lake Superior-type banded iron formations. Here, the Labrador Trough is crossed by the Grenville Front. Trough rocks in the Grenville Province are highly metamorphosed, complexly folded and structurally dislocated. The high-grade metamorphism of the Grenville Province is responsible for recrystallization of both iron oxides and silica producing coarse-grained sugary quartz, magnetite, specular hematite schists and gneisses that are of improved quality for concentrating and processing. Potentially recoverable minerals in the project are predominantly magnetite and subordinate hematite.
Mineral Policy
We have a corporate policy prescribing internal controlcontrols and procedures with respect to auditing and estimating of minerals. The procedures contained in the policy include the calculation of mineral estimates at each property by our engineers, geologists and accountants, as well as third-party consultants. Management compiles and reviews the calculations, and once finalized, such information is used to prepare the disclosures for our annual and quarterly reports. The disclosures are reviewed and approved by management, including our presidentchief executive officer and chief financial officer. Additionally, the long-range mine planning and mineral estimates are reviewed annually by our Audit Committee. Furthermore, all changes to mineral estimates, other than those due to production, are adequately documented and submitted to senior operations officers for review and approval. Finally, periodic reviews of long-range mine plans and mineral reserve estimates are conducted at mine staff meetings, senior management meetings and by independent experts.
Mineral Reserves
Reserves are defined by SEC Industry Standard Guide 7 as that part of a mineral deposit that could be economically and legally extracted and produced at the time of the reserve determination. All reserves are classified as proven or probable and are supported by life-of-mine plans.
Reserve estimates are based on pricing that does not exceed the three-year trailing average index price of benchmark prices for iron ore and coal adjusted to our realized price. For the three-year period 2011 to 2013, the average international benchmark price of 62 percent Fe CFR China was $145 per dry metric ton. For the same period, the benchmark coal prices FOB U.S. East Coast were $219 per metric ton for low-volatile coal.
We evaluate and analyze mineral reserve estimates in accordance with our mineral policy and SEC requirements. The table below identifies the year in which the latest reserve estimate was completed.
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| | |
| Property | | Date of Latest Economic Reserve Analysis |
| U.S. Iron Ore | | |
Empire | | 2009 |
| Tilden | | 20112015 |
| Hibbing | | 20122015 |
| Northshore | | 20122015 |
| United Taconite | | 20132016 |
| Asia Pacific Iron Ore | | |
| Koolyanobbing | | 2013 |
North American Coal | | |
Pinnacle Complex | | 2013 |
Oak Grove | | 2012 |
Iron Ore Reserves
Ore reserve estimates for our iron ore mines as of December 31, 20142017 were estimated from fully designed open pits developed using three-dimensional modeling techniques. These fully designed pits incorporate design slopes, practical mining shapes and access ramps to assure the accuracy of our reserve estimates. InWith the first quarterlife of 2014, we mademine of the decision to idle all production at our Wabush mine. Production at our Wabush mine was idled by theKoolyanobbing complex nearing an end, of March 2014, and in November 2014, we determined to implement the permanent closure plan for the mine, which became effective in the fourth quarter of 2014. On November 19, 2014, we announced that we are pursuing exit options for our Eastern Canadianonly reporting reserves at Asia Pacific Iron Ore operations, which may result in the closure of the Bloom Lake mine. Additionally, as disclosed on January 2, 2015, active production at Bloom Lake mine has completely ceased and the mine has transitionedthat are planned to "care-and-maintenance" mode. As a result, the reserves previously reported for Wabush and Bloom Lake mines have been removed from our reserve estimates. be extracted. All of our remaining operationsoperations' reserves have been adjusted net of 20142017 production.
U.S. Iron Ore
All tonnages reported for our U.S. Iron Ore operating segment are in long tons of 2,240 pounds, have been rounded to the nearest 100,000 and are reported on a 100 percent100% basis.
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Iron Ore Mineral Reserves |
| as of December 31, 2014 |
| (In Millions of Long Tons) |
| | | | Proven | | Probable | | Proven & Probable | | Saleable Product 2,3 | | Previous Year |
| Property | Cliffs Share | | Tonnage | % Grade | | Tonnage | % Grade | | Tonnage | % Grade5 | | Process Recovery4 | Tonnage | | P&P Crude Ore | Saleable Product |
| Empire | 79 | % | | 14.6 |
| 20.9 |
| | — |
| — |
| | 14.6 |
| 20.9 |
| | 32% | 4.7 |
| | 4.7 |
| 1.4 |
|
Tilden Hematite1 | 85 | % | | 454.3 |
| 35.7 |
| | 130.0 |
| 36.1 |
| | 584.3 |
| 35.8 |
| | 34% | 199.6 |
| | 604.6 |
| 207.2 |
|
| Tilden Magnetite | 85 | % | | 66.0 |
| 29.1 |
| | 11.7 |
| 29.2 |
| | 77.7 |
| 29.1 |
| | 38% | 29.5 |
| | 84.6 |
| 31.9 |
|
| Total Tilden | 85 | % | | 520.3 |
| | | 141.7 |
| | | 662.0 |
| | | 35% | 229.1 |
| | 689.2 |
| 239.1 |
|
| Hibbing | 23 | % | | 239.5 |
| 18.9 |
| | 20.7 |
| 18.9 |
| | 260.2 |
| 18.9 |
| | 26% | 68.0 |
| | 287.5 |
| 75.4 |
|
| Northshore | 100 | % | | 323.7 |
| 25.5 |
| | 712.6 |
| 24.8 |
| | 1,036.3 |
| 25.0 |
| | 34% | 351.8 |
| | 1,051.4 |
| 356.9 |
|
| United Taconite | 100 | % | | 409.2 |
| 23.1 |
| | 65.9 |
| 22.9 |
| | 475.1 |
| 23.1 |
| | 34% | 159.2 |
| | 489.4 |
| 164.1 |
|
| Totals | | | 1,507.3 |
| | | 940.9 |
| | | 2,448.2 |
| | | | 812.8 |
| | 2,522.2 |
| 836.9 |
|
| | | | | | | | | | | | | | | | | |
1 Tilden hematite reported grade is percent FeT; all other properties are percent magnetic iron |
2 Saleable product is a standard pellet containing 60 to 66 percent Fe calculated from both proven and probable mineral reserves |
3 Saleable product is reported on a dry basis; shipped products typically contain 1 to 4 percent moisture |
4 Process recovery includes all factors for converting crude ore tonnage to saleable product |
5 Cutoff grades are 15 percent magnetic iron for Hibbing and Empire, 17 percent for United Taconite, 19 percent for Northshore and 20 percent for Tilden. Cutoff for Tilden hematite is 25 percent FeT. |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Iron Ore Mineral Reserves |
| as of December 31, 2017 |
| (In Millions of Long Tons) |
| | | | Proven | | Probable | | Proven & Probable | | Saleable Product2,3 | | Previous Year |
| Property | Cliffs Share | | Tonnage | % Grade | | Tonnage | % Grade | | Tonnage | % Grade5 | | Process Recovery4 | Tonnage | | Proven & Probable Crude Ore | Saleable Product |
Tilden1 | 100 | % | | 263.6 |
| 34.7 |
| | 82.7 |
| 33.9 |
| | 346.3 |
| 34.5 |
| | 37% | 129.2 |
| | 367.8 |
| 136.3 |
|
| Hibbing | 23 | % | | 154.0 |
| 19.6 |
| | 24.7 |
| 19.6 |
| | 178.7 |
| 19.6 |
| | 26% | 47.2 |
| | 233.0 |
| 61.7 |
|
| Northshore | 100 | % | | 235.8 |
| 24.9 |
| | 557.4 |
| 24.2 |
| | 793.2 |
| 24.4 |
| | 32% | 255.9 |
| | 808.0 |
| 261.1 |
|
| United Taconite | 100 | % | | 413.6 |
| 22.6 |
| | 415.5 |
| 21.9 |
| | 829.1 |
| 22.2 |
| | 32% | 264.6 |
| | 842.8 |
| 269.3 |
|
| Totals | | | 1,067.0 |
| | | 1,080.3 |
| | | 2,147.3 |
| | | | 696.9 |
| | 2,251.6 |
| 728.4 |
|
| | | | | | | | | | | | | | | | | |
1 Tilden hematite reported grade is percent FeT; all other properties are percent magnetic iron. During 2017, our ownership interest in Tilden increased to 100%. |
2 Saleable product is a standard pellet containing 60% to 66% Fe calculated from both proven and probable mineral reserves. |
3 Saleable product is reported on a dry basis; shipped products typically contain 1% to 4% moisture. |
4 Process recovery includes all factors for converting crude ore tonnage to saleable product. |
5 Cutoff grades are 15% magnetic iron for Hibbing, 17% for United Taconite, 19% for Northshore. Cutoff for Tilden hematite is 25% FeT. |
As previously announced, we entered into an agreement with our partner at the Empire mine on February 24, 2014 in regard to an extension of the mine life until 2016. Reserve figures for the Empire mine have been updated to reflect the increased crude ore tonnage and pellet production we expect to realize based on the extended mine life.
Asia Pacific Iron Ore
All tonnages reported for our Asia Pacific Iron Ore operating segment are in metric tons of 2,205 pounds, have been rounded to the nearest 100,000 and are reported on a 100 percent100% basis.
| | Asia Pacific Iron Ore Mineral Reserves | | as of December 31, 2014 | |
| as of December 31, 2017 | | as of December 31, 2017 |
(In Millions of Metric Tons)1 | (In Millions of Metric Tons)1 | (In Millions of Metric Tons)1 |
| | | | Proven | | Probable | | Proven & Probable | | Previous Year Total | | | Proven | | Probable | | Proven & Probable | | Previous Year Total |
| Property | Cliffs Share | | Tonnage | % Fe | | Tonnage | % Fe | | Tonnage | % Fe2 | | Tonnage | Cliffs Share | | Tonnage | % Fe | | Tonnage3 | % Fe | | Tonnage | % Fe2 | | Tonnage |
| Koolyanobbing | 100% | | 6.5 | 57.9 |
| | 54.3 |
| 60.1 | | 60.8 |
| 59.8 | | 64.5 | 100% | | 1.7 | 56.5 |
| | 8.0 |
| 59.6 | | 9.7 |
| 59.1 | | 42.7 |
| | | | | | | | | | | | | | | |
1 Tonnages reported are saleable product reported on a dry basis; shipped products contain approximately 3 percent moisture | |
2 Cutoff grade is 54 percent FeT | |
1 Tonnages reported are saleable product reported on a dry basis; shipped products contain approximately 5% moisture. | | 1 Tonnages reported are saleable product reported on a dry basis; shipped products contain approximately 5% moisture. |
2 Cutoff grade is 54% FeT. | | 2 Cutoff grade is 54% FeT. |
3 Tonnage decreased due to low grade pellet discount increase which reduced the amount of economic tonnage available. | | 3 Tonnage decreased due to low grade pellet discount increase which reduced the amount of economic tonnage available. |
Coal Reserves
Coal reserves estimates for our North American underground mines as of December 31, 2014 were estimated using three-dimensional modeling techniques, coupled with scheduled mine plans. The Pinnacle operations and Oak Grove operations reserves have not changed net of 2014 mine production. Effective December 31, 2014, the sale of the CLCC assets was completed and, as a result, the reserves previously reported have been removed from our reserve estimates.
North American Coal
All tonnages reported for our North American Coal operating segment are in short tons of 2,000 pounds, have been rounded to the nearest 100,000 and are reported on a 100 percent basis. |
| | | | | | | | | | | | | | | | | | | |
| Recoverable Coal Reserves |
| as of December 31, 2014 |
(In Millions of Short Tons)1 |
| | | | Category2 | | Coal Type | | | | Reserve Classification | | Quality | | Previous Year |
| Property/Seam | Cliffs Share | | Mine Type | | Proven | | Probable | | Total P&P | | % Sulfur | | As Received Btu/lb | Total P&P |
| Pinnacle Complex | | | | | | | | | | | | | | | | | | | |
| Pocahontas No 3 | 100% | | Assigned | | Metallurgical | | U/G | | 29.0 | | 9.9 | | 38.9 | | 0.92 | | 14,000 | | 41.6 |
| Pocahontas No 4 | 100% | | Unassigned | | Metallurgical | | U/G | | 2.8 | | 0.5 | | 3.3 | | 0.51 | | 14,000 | | 3.3 |
| Oak Grove | | | | | | | | | | | | | | | | | | | |
| Blue Creek Seam | 100% | | Assigned | | Metallurgical | | U/G | | 28.7 | | 4.0 | | 32.7 | | 0.57 | | 14,000 | | 35.0 |
| Totals | | | | | | | | | 60.5 | | 14.4 | | 74.9 | | | | | | 79.9 |
| | | | | | | | | | | | | | | | | | | | |
1 Recoverable coal is reported on a wet basis containing approximately 6 percent moisture |
2 Assigned reserves represent coal that can be mined without a significant capital expenditure, whereas unassigned reserves will require significant capital expenditures before production could be realized |
Alabama Dust Litigation. Bluestone LitigationThere are currently three cases. On April 7, 2017, the Company was served with an Amended Complaint adding Cliffs, among others, as a defendant to a lawsuit brought by Bluestone Coal Corporation and Double-Bonus Mining Company against Pinnacle Mining Company, LLC and Target Drilling, Inc. in the Alabama state court systemU.S. District Court for the Southern District of West Virginia. The Amended Complaint alleges that comprise the Alabama Dust Litigation. Generally, these claims are broughtdefendants deviated from plans authorized by nearby homeowners who allege that dust emanating from the Concord Preparation Plant causes damage to their properties. All three of these cases are activeplaintiffs and settlement discussions are proceeding. It is possible that these types of complaints may continue to be filedU.S. Mine Safety and Health Administration in the future, butdrilling of a borehole in 2013 and 2014 at the overall impactPinnacle mine and through an inactive portion of these cases is not anticipated currentlyplaintiffs’ mine. Plaintiffs further allege negligence and trespass in the drilling of the borehole and claim compensatory and punitive damages due to haveflooding. Cliffs denies it has any liability in connection with plaintiffs' claims and intends to vigorously defend the lawsuit.
CCAA Proceedings. Refer to NOTE 20 - COMMITMENTS AND CONTINGENCIES for a material financial impact on our business.
the CCAA Proceedings underway with respect to the Bloom Lake Investigation. CQIM, Bloom Lake General Partner LimitedGroup and Bloom Lake were investigatedthe Wabush Group. Such description is incorporated by Environment Canada in relation to alleged violations of Section 36(3) of the Fisheries Act that prohibits the deposit of a deleterious substance in water frequented by fish or in any place where the deleterious substance may enter any such water and Section 40(3) of the Fisheries Act in relation to an alleged failure to comply with a direction of an inspector. The investigation covered several alleged incidents that occurred between April 2011 and October 2012. The Bloom Lake investigation was settled on December 19, 2014 resolving all allegations and included a fine of C$1.5 million and a contribution to the Environmental Damages Fund of C$6.0 million. CQIM, Bloom Lake General Partner Limited and Bloom Lake enteredreference into a Management Directive with Environment Canada which outlines compliance obligations to address these concerns going forward.this Item 3.
EssarERISA Litigation. The Cleveland-Cliffs Iron Company, Northshore Mining Company and Cliffs Mining Company (collectively, the "Cliffs Plaintiffs")On May 14, 2015, a lawsuit was filed a complaint against Essar in the U.S. District Court for the Northern District of Ohio Eastern Division,captioned Paul Saumer, individually and on January 12, 2015, assertingbehalf of all others similarly situated, v. Cleveland-Cliffs Inc., et al., No. 1:15-CV-00954. This action was purportedly brought on behalf of the Northshore and Silver Bay Power Company Retirement Savings Plan (the "Plan") and certain participants and beneficiaries of the Plan during the class period, defined in the complaint as April 2, 2012 to the present, against Cleveland-Cliffs Inc., its investment committee, Northshore, the Employee Benefits Administration Department of Northshore, and certain current and former officers. Plaintiff amended the complaint to name as defendants additional current and former employees who served on the investment committee. The suit alleged that Essarthe defendants breached their duties to the Essar Sale Agreementplaintiffs and the Plan in violation of ERISA fiduciary rules by, among other things, failingcontinuing to take delivery ofoffer and payhold Cleveland-Cliffs Inc. stock as a Plan investment option during the class period. The relief sought included a request for its nominated ore in 2014, failinga judgment ordering the defendants to make certain payments under a true up provision, and disclosing confidential information. The complaint also seeks a declaration that Essar is not entitledgood to receive certain credit payments under the terms ofPlan all losses to the Essar Sale Agreement. The Cliffs Plaintiffs seek damages in excess of $90 million. Essar filed an Answer and Counterclaim on February 11, 2015, seeking damages in excess of $160 million for variousPlan resulting from the alleged breaches of fiduciary duties. On April 1, 2016, the Essar Sale Agreement, including failureCourt granted defendants' motion to deliver ore, overchargingdismiss the lawsuit, which dismissal the Sixth Circuit Court of Appeals affirmed on April 1, 2017. All deadlines for certain deliveries, failure to pay certain credit paymentsfurther appeals have passed and disclosing confidential information.this matter is closed.
Maritime AsbestosExchange Offer Litigation. The Cleveland-Cliffs Iron Company and/or The Cleveland-Cliffs Steamship Company have been named defendants in 489 actions brought from 1986 to date by former seamen claiming damages for various illnesses allegedly suffered as the result of exposure to airborne asbestos fibers while serving as crew members aboard the vessels previously owned or managed by our entities until the mid-1980s. All of these actions have been consolidated into multidistrict proceedings in the Eastern District of Pennsylvania, along with approximately 30,000 other cases from various jurisdictions that wereOn March 14, 2016, a putative class action was filed against other defendants. Through a series of court orders, the docket has been reduced to approximately 3,500 active cases. We are a named defendant in approximately 50 cases. These cases are in the discovery phase. The court has dismissed the remainder of the cases without prejudice. Those dismissed cases could be reinstated upon application by plaintiffs’ counsel. The claims against our entities are insured in amounts that vary by policy year; however, the manner in which coverage will be applied remains uncertain. Our entities continue to vigorously contest these claims and have made no settlements on them.
Pinnacle Mine Environmental Litigation. On June 22, 2010, the West Virginia DEP filed a lawsuit in the Wyoming County Circuit Court against the Pinnacle mine alleging past non-compliance with its NPDES discharge permit. The complaint seeks injunctive relief and penalties. An initial penalty proposal of $1.0 million was offered by the West Virginia DEP in March 2012; however, Pinnacle disagrees with the alleged violations and has met with the DEP to present facts supporting a review and reduction of the proposed penalty.
Pointe Noire Investigation. Wabush Mines was investigated by Environment Canada in relation to alleged violations of (i) Section 36(3) of the Fisheries Act, which prohibits the deposit of a deleterious substance in water frequented by fish or in any place where the deleterious substance may enter any such water, and (ii) Section 5.1 of the Migratory Bird Convention Act, 1994. The Québec Ministry of Sustainable Development, Environment, Wildlife and Parks also conducted an investigation into alleged violations of Section 8 of the Hazardous Material Regulation, which prohibits the discharge of a hazardous material to the environment. The investigations covered events surrounding and leading up to the alleged release of approximately 1,320 gallons of fuel oil into the Bay of Sept-Iles on September 1, 2013. We cooperated with the investigators and agency response officials. In April 2014, the Québec Ministry of Justice filed a penalty charge related to the incident. The Pointe Noire investigation was settled in December 2014. A fine of C$750,000 and C$61,000 in costs were agreed to be paid. We are anticipating a report by the Québec Ministry related to their assessment of the cleanup activities and further direction related to requirements for additional environmental monitoring, if any.
Putative Class Action Lawsuits. In May 2014, alleged purchasers of our common shares filed suit in the U.S. District Court for the NorthernSouthern District of Ohio against us and certain current and former officers and directors of the Company. The action isNew York captioned Department of the Treasury of the State of New Jersey and Its Division of InvestmentWaxman, et al. v. Cliffs Natural ResourcesCleveland-Cliffs Inc., et al., No. 1:14-CV-1031.16-cv-01899. Generally, the lawsuit alleged that the exchange offers for certain of our existing senior notes announced on January 27, 2016 violated the Trust Indenture Act of 1939 (the "TIA") and breached the indentures governing the senior notes subject to the exchange offers because the exchange offers were offered only to certain noteholders that were qualified institutional buyers ("QIBs") and not to non-QIBs. The action asserts violationssuit sought class certification with respect to non-QIB noteholders of the federal securities laws based on alleged false or misleading statements or omissions during the period of March 14, 2012 to March 26, 2013, regarding operations at our Bloom Lake mine in Québec, Canada,5.90% 2020 Senior Notes and the impact6.25% 2040 Senior Notes (collectively, the “Class Notes”), which QIBs were permitted to exchange for newly-issued 1.5 Lien Notes. Plaintiffs alleged that the exchange offers had the effect of subordinating their Class Notes to those operations on our finances and outlook, including sustainability of the dividend,QIBs who elected to exchange their notes and also impaired the Plaintiffs’ rights to receive payment of the principal and interest under the Class Notes and to institute suit to compel such payment. In addition to alleged violation of the TIA and breach of contract, Plaintiffs sought unspecified damages for breach of the implied covenant of good faith and fair dealing and unjust enrichment, and also sought declaratory judgment that the alleged misstatements caused our common shares to trade at artificially inflated prices. The lawsuit seeks class certificationexchange offers were null and an award of monetary damages to the putative class in an unspecified amount, along with costs of suit and attorneys’ fees.void. On October 21, 2014, defendantsMay 16, 2016, we filed a motion to dismiss this action. The lawsuit, has been referred to our insurance carriers.which was granted on December 6, 2016. All deadlines for further appeals have passed and this matter is closed.
In June 2014, an alleged purchaser of the depositary shares issued by Cliffs in Mesabi Metallics Adversary Proceeding. On September 7, 2017, Mesabi Metallics Company LLC (f/k/a public offering in February 2013Essar Steel Minnesota LLC) filed a putative class action, whichcomplaint against Cleveland-Cliffs Inc. in the Essar Steel Minnesota LLC and ESML Holdings Inc. bankruptcy proceeding that is currently pending in the U.S. DistrictUnited States Bankruptcy Court, for the Northern District of OhioDelaware. Mesabi Metallics alleges tortious interference with its contractual rights and is captioned Rosenberg v. Cliffs Natural Resources Inc., et al., No. 1:14-cv-01531, The suit asserts claims against us,business relations involving certain currentvendors, suppliers and former officerscontractors, violations of federal and directorsMinnesota antitrust laws through monopolization, attempted monopolization and restraint of trade, violation of the automatic stay, and civil conspiracy with unnamed defendants. Mesabi Metallics amended the complaint to add additional defendants Cleveland-Cliffs Minnesota Land Development Company ("Cliffs Minnesota Land") and several underwritersGlacier Park Iron Ore Properties LLC ("GPIOP") and has asserted various claims relating to Cliffs Minnesota Land's acquisition of the offering, alleging disclosure violations in the registration statement regarding operations at our Bloom Lake minea combination of GPIOP's undivided and the impactwhole fee interests as well as mineral and surface leases, a portion of those operations on our financeswhich were formerly leased by GPIOP to Mesabi Metallics. The amended complaint also includes claims related to avoidance and outlook. This actionrecovery of unauthorized post-petition transfers, claims disallowance, civil contempt and civil conspiracy. Mesabi Metallics seeks, class certification and monetary relief in an unspecified amount, along with costs of suit and attorneys’ fees. This lawsuit has been referred to our insurance carriers.
The Rio Tinto Mine Site. The Rio Tinto Mine Site is an historic underground copper mine located near Mountain City, Nevada, where tailings were placed in Mill Creek, a tributary to the Owyhee River. Site investigation and remediation work is being conducted in accordance with a Consent Order dated September 14, 2001 between the NDEP and the RTWG composed of the Company, Atlantic Richfield Company, Teck Cominco American Incorporated and E. I. duPont de Nemours and Company. The Consent Order provides for technical review by the U.S. Department of the Interior Bureau of Indian Affairs, the U.S. Fish and Wildlife Service, U.S. Department of Agriculture Forest Service, the NDEP and the Shoshone-Paiute Tribe of the Duck Valley Reservation (collectively, "Rio Tinto Trustees"). In recognition of the potential for an NRD claim, the parties actively pursued a global settlement that would include the EPA and encompass both the remedial action and the NRD issues.
The NDEP published a Record of Decision for the Rio Tinto Mine, which was signed on February 14, 2012 by the NDEP and the EPA. On September 27, 2012, the agencies subsequently issued a proposed Consent Decree, which was lodged with the U.S. District Court for the District of Nevada and opened for 30-day public comment on October 4, 2012. The Consent Decree subsequently was finalized on May 20, 2013. Under the terms of the Consent Decree, the RTWG has agreed to pay over $29 million in cleanup costs and natural resource damages to the site and surrounding area. The Company's share of the total settlement cost, which includes remedial action, insurance and other oversight costs, is approximately $12 million.
Under the terms of the Consent Decree, the RTWG will be responsible for removing mine tailings from Mill Creek, improving the creek to support redband trout and improving water quality in Mill Creek and the East Fork Owyhee River. Previous cleanup projects included filling in old mine shafts, grading and covering leach pads and tailings, and building diversion ditches. NDEP will oversee the cleanup, with input from EPA and monitoring from the nearby Shoshone-Paiute Tribes of Duck Valley.
Shareholder Derivative Lawsuits. In June and July 2014, alleged shareholders of Cliffs filed three derivative actions in the Cuyahoga County, Ohio, Court of Common Pleas asserting claims against certain current and former officers and directors of the Company. These actions, captioned Black v. Carrabba, et al., No. CV-14-827803, Asmussen v. Carrabba, et al., No. CV-14-829259, and Williams, et al. v. Carrabba, et al., No. CV-14-829499, allege that the individually named defendants violated their fiduciary duties to the Company by, among other things, disseminating falseunspecified damages, declaratory judgment, and misleading information regarding operations at our Bloom Lake mine in Québec, Canada,injunctive relief. We believe the claims are unmeritorious and intend to vigorously defend the lawsuit.
Michigan Electricity Matters. See NOTE 20 - COMMITMENTS AND CONTINGENCIES for a description of the FERC proceedings to determine, among other things, allocation of SSR costs, whether retroactive surcharges are permissible and the impacttotal amount of those operations on our finances and outlook, including sustainabilitySSR compensation, all of the dividend, failingwhich are currently subject to maintain internal controls, and failing to appropriately oversee and manage the Company. The complaints assert additional claims for unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The complaints seek damages, restitution, and equitable relief against the individually named defendants and in favor of the Company, along with costs of suit and attorneys’ fees. These lawsuits have been referred to our insurance carriers. As these are derivative actions, we have been named only as a nominal defendant.
Southern Natural Gas Lawsuit: On July 23, 2014, Southern Natural Gas Company, L.L.C. filed a lawsuit in the Circuit Court of Jefferson County, Alabama (Case No. 68-CV-2014-900533.00) against the Company and others. The suit seeks to prevent coal mining activity underneath a gas pipeline at our Oak Grove property and to require defendants to pay the costs associated with relocating that pipeline. The suit seeks declaratory judgment, permanent injunctive relief and nuisance damages. The Circuit Court denied our motion to dismiss the complaint and we subsequently filed a petition for a writ of mandamus in the Alabama Supreme Court requesting that it direct the Circuit Court to dismiss the case for lack of subject matter jurisdiction. We filed a motion to stay discovery pending the Alabama Supreme Court's decision on the mandamus petition. Unless and until that motionappeal. Such description is granted, discovery is ongoing in the Circuit Court. We also filed a Joinder of Additional Parties, including Kinder Morgan, Inc., and a Counterclaim, asserting breach or repudiation of easement agreements, interference with business relations, and slander of title.incorporated by reference into this Item 3.
Taconite MACT Compliance Review. EPA Region 5 issued Notices of Violation during the first quarter of 2014 to Empire, Tilden and United Taconite related to alleged historical violations of the Taconite MACT rule and certain elements of the respective state-issued Title V operating permits. Initial meetings were heldFor issues not already resolved, the facilities continue to implement actions that mitigate any future exposures. EPA has proposed, and Cliffs has agreed to, a tolling agreement which targeted a completion of the enforcement action by June 6, 2018. Based on current information, Cliffs anticipates the final settlement for alleged exceedances at United Taconite to be resolved by consent decree with thea total penalty of no more than $0.3 million to be comprised of a combination of cash penalty and a supplemental environmental project. EPA has not yet shared draft settlement documents for Empire or Tilden, but Cliffs anticipates receiving them early in the second quarter of 2014. While the2018. This enforcement matter has been referred to the DOJ for enforcement, the overall impact is not anticipated currently to have a material adverse impact on our business.
Worldlink ArbitrationNewfoundland and Labrador, Trial Division (General) captioned Johnson, et al. v. Cliffs Mining Company, et al. against Cliffs Natural Resources Inc., Cliffs Mining Company, and certain former and current officers, directors and employees, on behalf of all non-union employees and retirees of Wabush Mines, seeking, among other things, various declarations and damages relating to the “Contributory Salaried Plan for Salaried Employees of Wabush Mines, Cliffs Mining Company, Managing Agent, Arnaud Railway Company and Wabush Lake Railway Company, Limited”. A separate complaint captioned In October 2011, our wholly owned subsidiary, CQIM, along with Bloom Lake General Partner Limited and The Bloom Lake Iron Ore Mine Limited Partnership, instituted an arbitration claimSkinner, et al. v. Cliffs Mining Company, et al. was apparently filed on or about June 23, 2017 in the same court against the Bloom Lake mine’s former customer, Worldlink Resources Limited, for material and/or fundamental breachessame defendants alleging substantially the same allegations on behalf of the parties’ 2007 offtake agreement for the purchasecertain USW union employees and saleretirees of iron concentrate produced at the Bloom Lake mine. Our subsidiaries filed the arbitration claim with the International Court of Arbitration of the International Chamber of Commerce pursuantWabush Mines, seeking similar relief. We object to the dispute resolution provisionsvalidity of the offtake agreement. Our subsidiaries terminated the offtake agreement with Worldlink in August 2011 due to Worldlink’s failure to fulfill its obligations under the agreement and Worldlink’s demand to renegotiate the price of the iron ore concentrate in spite of being party to a long-term offtake agreement. Our subsidiaries claimed damages for the breach of the offtake agreement in excess of $85 million and Worldlink counterclaimed for damages in excess of $100 million. In November 2014, the arbitrators decided in favor of Worldlink and awarded it damages in an amount of approximately $71 million as well as approximately $25 million in accrued interest from the date of termination of the offtake agreement in August 2011 and arbitration costs. This judgment has been included in the CCAA filing of the Bloom Lake Groupthese claims and will be treatedvigorously defend as an unsecured claim.necessary.
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| Item 4. | Mine Safety Disclosures |
We are committed to protecting the occupational health and well-being of each of our employees. Safety is one of our core values, and we strive to ensure that safe production is the first priority for all employees. Our internal objective is to achieve zero injuries and incidents across the Company by focusing on proactively identifying needed prevention activities, establishing standards and evaluating performance to mitigate any potential loss to people, equipment, production and the environment. We have implemented intensive employee training that is geared toward maintaining a high level of awareness and knowledge of safety and health issues in the work environment through the development and coordination of requisite information, skills and attitudes. We believe that through these policies, we have developed an effective safety management system.
Under the Dodd-Frank Act, each operator of a coal or other mine is required to include certain mine safety results within its periodic reports filed with the SEC. As required by the reporting requirements included in §1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K, the required mine safety results regarding certain mining safety and health matters for each of our mine locations that are covered under the scope of the Dodd-Frank Act are included in Exhibit 95 of Item 15. Exhibits and Financial Statement Schedules of this Annual Report on Form 10-K.
PART II
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| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Stock Exchange Information
Our common shares (ticker symbol CLF) are listed on the NYSE.
Common Share Price Performance and Dividends
The following table sets forth, for the periods indicated, the high and low sales prices per common share as reported on the NYSE and the dividends declared per common share:NYSE:
| | | | | 2014 | | 2013 | | 2017 | | 2016 |
| | | High | | Low | | Dividends | | High | | Low | | Dividends | | High | | Low | | High | | Low |
| First Quarter | | $ | 26.63 |
| | $ | 17.40 |
| | $ | 0.15 |
| | $ | 40.40 |
| | $ | 17.95 |
| | $ | 0.15 |
| | $ | 12.37 |
| | $ | 7.70 |
| | $ | 3.75 |
| | $ | 1.20 |
|
| Second Quarter | | 21.25 |
| | 13.60 |
| | 0.15 |
| | 23.75 |
| | 15.50 |
| | 0.15 |
| | 9.06 |
| | 5.56 |
| | 5.83 |
| | 2.77 |
|
| Third Quarter | | 18.41 |
| | 10.19 |
| | 0.15 |
| | 25.95 |
| | 15.41 |
| | 0.15 |
| | 8.77 |
| | 6.45 |
| | 8.45 |
| | 5.19 |
|
| Fourth Quarter | | 11.70 |
| | 5.63 |
| | 0.15 |
| | 28.98 |
| | 19.88 |
| | 0.15 |
| | 7.73 |
| | 5.60 |
| | 10.90 |
| | 4.91 |
|
| Year | | 26.63 |
| | 5.63 |
| | $ | 0.60 |
| | 40.40 |
| | 15.41 |
| | $ | 0.60 |
| | 12.37 |
| | 5.56 |
| | 10.90 |
| | 1.20 |
|
At February 23, 2015,12, 2018, we had 1,3121,210 shareholders of record.
On January 22, 2015, we amended the Amended and Restated Multicurrency Credit Agreement (Amendment No. 6) among Cliffs Natural Resources Inc. and various lenders dated August 11, 2011 (as further amended by Amendment No. 1 as of October 16, 2012, Amendment No. 2 as of February 8, 2013, Amendment No. 3 as of June 30, 2014, Amendment No. 4 as of September 9, 2014 and Amendment No. 5 as of October 24, 2014),We did not declare or revolving credit agreement, to effect the following, among other items:
a reduction of the permitted amount of quarterlypay any cash dividends on our common shares during the years ended December 31, 2017 or 2016. Any determination to not more than $0.01 per sharepay dividends on our common shares in any fiscal quarter.
On January 26, 2015, we announcedthe future will be at the discretion of our Board of Directors and dependent upon then-existing conditions, including our operating results and financial condition, capital requirements, contractual restrictions, business prospects and other factors that our Board of Directors had decidedmay deem relevant. Additionally, the agreement governing our ABL Facility contains, and agreements governing any of our future debt may contain, covenants and other restrictions that, in certain circumstances, could limit the level of dividends that we are able to eliminate the quarterly dividend of $0.15 per sharepay on our common shares. The decision is applicable to the first quarter of 2015 and all subsequent quarters. The elimination of the common share dividend provides us with additional free cash flow of approximately $92 million annually, whichThere can be no assurance that we intend to use for further debt reduction. We see accelerated debt reduction as a more effective means of protecting our shareholders than continuing towill pay a common share dividend.dividend in the future.
Shareholder Return Performance
The following graph shows changes over the past five-year period in the value of $100 invested in: (1) Cliffs' common shares; (2) S&P 500 Stock Index; (3) S&P 500 Steel GroupTotal Market Index; and (4) S&P Midcap 400Metals and Mining Select Industry Index. The values of each investment are based on price change plus reinvestment of all dividends reported to shareholders.shareholders, based on monthly granularity.
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| | | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 |
| Cliffs Natural Resources Inc. | Return % | | | | 70.69 | | -19.24 | | -34.74 | | -30.37 | | -71.69 |
| | Cum $ | | 100.00 | | 170.69 | | 137.85 | | 89.97 | | 62.65 | | 17.74 |
| S&P 500 Index - Total Returns | Return % | | | | 15.07 | | 2.11 | | 16.00 | | 32.39 | | 13.69 |
| | Cum $ | | 100.00 | | 115.07 | | 117.50 | | 136.30 | | 180.44 | | 205.14 |
| S&P 500 Steel Index | Return % | | | | 33.86 | | -23.01 | | -11.84 | | 13.86 | | -9.06 |
| | Cum $ | | 100.00 | | 133.86 | | 103.06 | | 90.86 | | 103.45 | | 94.08 |
| S&P Midcap 400 Index | Return % | | | | 26.64 | | -1.74 | | 17.86 | | 33.50 | | 9.77 |
| | Cum $ | | 100.00 | | 126.64 | | 124.43 | | 146.66 | | 195.79 | | 214.92 |
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| | | | | | | | | | | | | | |
| | | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| Cleveland-Cliffs Inc. | Return % | | — |
| | (30.17) | | (71.56) | | (77.87) | | 432.28 | | (14.27) |
| | Cum $ | | 100.00 |
| | 69.83 | | 19.86 | | 4.39 | | 23.39 | | 20.06 |
| S&P 500 Index - Total Returns | Return % | | — |
| | 32.36 | | 13.65 | | 1.38 | | 11.93 | | 21.80 |
| | Cum $ | | 100.00 |
| | 132.36 | | 150.43 | | 152.50 | | 170.70 | | 207.91 |
| S&P Total Market Index | Return % | | — |
| | 33.37 | | 12.43 | | 0.46 | | 12.62 | | 21.13 |
| | Cum $ | | 100.00 |
| | 133.37 | | 149.95 | | 150.64 | | 169.65 | | 205.49 |
| S&P Metals and Mining | Return % | | — |
| | (5.35) | | (25.63) | | (50.76) | | 105.09 | | 20.61 |
| | Cum $ | | 100.00 |
| | 94.65 | | 70.39 | | 34.66 | | 71.09 | | 85.74 |
Issuer Purchases of Equity Securities
The following table presents information with respect to repurchases by the Companyus of our common shares during the periods indicated.indicated:
ISSUER PURCHASES OF EQUITY SECURITIES
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| Period | | Total Number of Shares (or Units) Purchased (1) | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs (2) |
| October 1 - 31, 2014 | | — |
| | $ | — |
| | — | | $200,000,000 |
| November 1 - 30, 2014 | | 5,792 |
| | $ | 10.73 |
| | — | | $200,000,000 |
| December 1 - 31, 2014 | | 3,119 |
| | $ | 6.71 |
| | — | | $200,000,000 |
| Total | | 8,911 |
| | $ | 9.32 |
| | — | | $200,000,000 |
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| | | | | | | | | | | |
| Period | | Total Number of Shares (or Units) Purchased1 | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs |
| October 1 - 31, 2017 | | 1,259 |
| | $ | 7.15 |
| | — | | — |
| November 1 - 30, 2017 | | — |
| | $ | — |
| | — | | — |
| December 1 - 31, 2017 | | 735,387 |
| | $ | 6.71 |
| | — | | — |
| Total | | 736,646 |
| | $ | 6.71 |
| | — | | — |
| | | | | | | | | |
1 These shares were delivered to us to satisfy tax withholding obligations due upon the vesting or payment of stock awards. |
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| These shares were delivered to us by employees to satisfy tax withholding obligations due upon the vesting or payment of stock awards or scheduled distributions from our VNQDC Plan. |
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(2)
| On August 25, 2014, the Board of Directors authorized a new share repurchase plan pursuant to which we may buy back our outstanding common shares in the open market or in private negotiated transactions up to a maximum of $200 million. No shares have been purchased through December 31, 2014. The authorization is active until December 31, 2015. |
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| Item 6. | Selected Financial Data |
| | | Summary of Financial and Other Statistical Data - Cliffs Natural Resources Inc. and Subsidiaries | |
| Summary of Financial and Other Statistical Data - Cleveland-Cliffs Inc. and Subsidiaries | | Summary of Financial and Other Statistical Data - Cleveland-Cliffs Inc. and Subsidiaries |
| | | 2014 (g) | | 2013 (f) | | 2012 (d) | | 2011 (c) | | 2010 (b) | 2017 (a) | | 2016 (b) | | 2015 (c) | | 2014 (d) | | 2013 (e) |
| Financial data (in millions, except per share amounts) * | Financial data (in millions, except per share amounts) * | | | | | | | | | Financial data (in millions, except per share amounts) * | | | | | | | | |
| Revenue from product sales and services | Revenue from product sales and services | $ | 4,623.7 |
| | $ | 5,691.4 |
| | $ | 5,872.7 |
| | $ | 6,563.9 |
| | $ | 4,483.8 |
| $ | 2,330.2 |
| | $ | 2,109.0 |
| | $ | 2,013.3 |
| | $ | 3,373.2 |
| | $ | 3,890.8 |
|
| Cost of goods sold and operating expenses | Cost of goods sold and operating expenses | (4,172.3 | ) | | (4,542.1 | ) | | (4,700.6 | ) | | (3,953.0 | ) | | (3,025.1 | ) | (1,828.5 | ) | | (1,719.7 | ) | | (1,776.8 | ) | | (2,487.5 | ) | | (2,406.4 | ) |
| Other operating expense | Other operating expense | (9,896.7 | ) | | (478.3 | ) | | (1,480.9 | ) | | (314.1 | ) | | (225.9 | ) | (78.1 | ) | | (148.5 | ) | | (85.2 | ) | | (755.6 | ) | | (104.1 | ) |
| Operating income (loss) | (9,445.3 | ) | | 671.0 |
| | (308.8 | ) | | 2,296.8 |
| | 1,232.8 |
| |
| Income (loss) from continuing operations | (8,311.6 | ) | | 359.8 |
| | (1,162.5 | ) | | 1,792.5 |
| | 997.4 |
| |
| Income and gain on sale from discontinued operations, net of tax | — |
| | 2.0 |
| | 35.9 |
| | 20.1 |
| | 22.5 |
| |
| Operating income | | 423.6 |
| | 240.8 |
| | 151.3 |
| | 130.1 |
| | 1,380.3 |
|
| Income from continuing operations | | 381.8 |
| | 219.2 |
| | 143.7 |
| | 56.4 |
| | 878.9 |
|
| Loss from discontinued operations, net of tax | | (18.7 | ) | | (19.9 | ) | | (892.1 | ) | | (8,368.0 | ) | | (517.1 | ) |
| Net income (loss) | Net income (loss) | (8,311.6 | ) | | 361.8 |
| | (1,126.6 | ) | | 1,812.6 |
| | 1,019.9 |
| 363.1 |
| | 199.3 |
| | (748.4 | ) | | (8,311.6 | ) |
| 361.8 |
|
| Loss (income) attributable to noncontrolling interest | Loss (income) attributable to noncontrolling interest | 1,087.4 |
| | 51.7 |
| | 227.2 |
| | (193.5 | ) | | — |
| 3.9 |
| | (25.2 | ) | | (0.9 | ) | | 1,087.4 |
| | 51.7 |
|
| Net income (loss) attributable to Cliffs shareholders | Net income (loss) attributable to Cliffs shareholders | (7,224.2 | ) | | 413.5 |
| | (899.4 | ) | | 1,619.1 |
| | 1,019.9 |
| 367.0 |
| | 174.1 |
| | (749.3 | ) | | (7,224.2 | ) |
| 413.5 |
|
| Preferred stock dividends | Preferred stock dividends | (51.2 | ) | | (48.7 | ) | | — |
| | — |
| | — |
| — |
| | — |
| | (38.4 | ) | | (51.2 | ) | | (48.7 | ) |
| Income (loss) attributable to Cliffs common shareholders | Income (loss) attributable to Cliffs common shareholders | $ | (7,275.4 | ) | | $ | 364.8 |
| | $ | (899.4 | ) | | $ | 1,619.1 |
| | $ | 1,019.9 |
| $ | 367.0 |
| | $ | 174.1 |
| | $ | (787.7 | ) | | $ | (7,275.4 | ) |
| $ | 364.8 |
|
| Earnings (loss) per common share attributable to | | | | | | | | | | |
| Cliffs shareholders - basic | | | | | | | | | | |
Earnings (loss) per common share attributable to
Cliffs common shareholders - basic | | | | | | | | | | |
| Continuing operations | Continuing operations | $ | (47.52 | ) | | $ | 2.39 |
| | $ | (6.57 | ) | | $ | 11.41 |
| | $ | 7.37 |
| $ | 1.34 |
| | $ | 0.98 |
| | $ | 0.63 |
| | $ | (0.14 | ) | | $ | 5.37 |
|
| Discontinued operations | Discontinued operations | — |
| | 0.01 |
| | 0.25 |
| | 0.14 |
| | 0.17 |
| (0.06 | ) | | (0.10 | ) | | (5.77 | ) | | (47.38 | ) | | (2.97 | ) |
Earnings (loss) per common share attributable to Cliffs shareholders - basic | $ | (47.52 | ) | | $ | 2.40 |
| | $ | (6.32 | ) | | $ | 11.55 |
| | $ | 7.54 |
| |
| Earnings (loss) per common share attributable to | | | | | | | | | | |
| Cliffs shareholders - diluted | | | | | | | | | | |
Earnings (loss) per common share attributable to
Cliffs common shareholders - basic | | $ | 1.28 |
| | $ | 0.88 |
| | $ | (5.14 | ) | | $ | (47.52 | ) | | $ | 2.40 |
|
Earnings (loss) per common share attributable to
Cliffs common shareholders - diluted | | | | | | | | | | |
| Continuing operations | Continuing operations | $ | (47.52 | ) | | $ | 2.36 |
| | $ | (6.57 | ) | | $ | 11.34 |
| | $ | 7.32 |
| $ | 1.32 |
| | $ | 0.97 |
| | $ | 0.63 |
| | $ | (0.14 | ) | | $ | 4.95 |
|
| Discontinued operations | Discontinued operations | — |
| | 0.01 |
| | 0.25 |
| | 0.14 |
| | 0.17 |
| (0.06 | ) | | (0.10 | ) | | (5.76 | ) | | (47.38 | ) | | (2.58 | ) |
Earnings (loss) per common share attributable to Cliffs shareholders - diluted | $ | (47.52 | ) | | $ | 2.37 |
| | $ | (6.32 | ) | | $ | 11.48 |
| | $ | 7.49 |
| |
Earnings (loss) per common share attributable to
Cliffs common shareholders - diluted | | $ | 1.26 |
| | $ | 0.87 |
| | $ | (5.13 | ) | | $ | (47.52 | ) | | $ | 2.37 |
|
| Total assets | Total assets | $ | 3,164.0 |
| | $ | 13,121.9 |
| | $ | 13,574.9 |
| | $ | 14,541.7 |
| | $ | 7,778.2 |
| $ | 2,953.4 |
| | $ | 1,923.9 |
| | $ | 2,135.5 |
| | $ | 3,147.2 |
| | $ | 13,102.9 |
|
| Long-term debt obligations (including capital leases) | Long-term debt obligations (including capital leases) | $ | 3,055.1 |
| | $ | 3,189.5 |
| | $ | 4,196.3 |
| | $ | 3,821.5 |
| | $ | 1,881.3 |
| $ | 2,335.1 |
| | $ | 2,213.5 |
| | $ | 2,755.6 |
| | $ | 2,911.5 |
| | $ | 2,968.4 |
|
| Net cash from operating activities | $ | 358.9 |
| | $ | 1,145.9 |
| | $ | 514.5 |
| | $ | 2,288.0 |
| | $ | 1,320.0 |
| |
| Net cash provided by operating activities | | $ | 338.1 |
| | $ | 303.0 |
| | $ | 37.9 |
| | $ | 358.9 |
| | $ | 1,145.9 |
|
| Net cash used in investing activities | | $ | (156.0 | ) | | $ | (57.9 | ) | | $ | (103.2 | ) | | $ | (103.6 | ) | | $ | (811.3 | ) |
| Net cash provided by (used in) financing activities | | $ | 498.9 |
| | $ | (206.4 | ) | | $ | 61.0 |
| | $ | (288.3 | ) | | $ | (171.9 | ) |
Distributions to preferred shareholders cash dividends (e)(f) | Distributions to preferred shareholders cash dividends (e)(f) | | | | | | | | | | Distributions to preferred shareholders cash dividends (e)(f) | | | | | | | | | |
| - Per depositary share | - Per depositary share | $ | 1.75 |
| | $ | 1.66 |
| | — |
| | — |
| | — |
| $ | — |
| | $ | — |
| | $ | 1.32 |
| | $ | 1.76 |
| | $ | 1.66 |
|
| - Total | - Total | $ | 51.2 |
| | $ | 48.7 |
| | — |
| | — |
| | — |
| $ | — |
| | $ | — |
| | $ | 38.4 |
| | $ | 51.2 |
| | $ | 48.7 |
|
Distributions to common shareholders cash dividends (a)(g) | Distributions to common shareholders cash dividends (a)(g) | | | | | | | | | | Distributions to common shareholders cash dividends (a)(g) | | | | | | | | | |
| - Per share | - Per share | $ | 0.60 |
| | $ | 0.60 |
| | $ | 2.16 |
| | $ | 0.84 |
| | $ | 0.51 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.60 |
| | $ | 0.60 |
|
| - Total | - Total | $ | 92.5 |
| | $ | 91.9 |
| | $ | 307.2 |
| | $ | 118.9 |
| | $ | 68.9 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | 92.5 |
| | $ | 91.9 |
|
| Repurchases of common shares | — |
| | — |
| | — |
| | $ | 289.8 |
| | — |
| |
| Common shares outstanding - basic (millions) | Common shares outstanding - basic (millions) | | | | | | | | | | | | | | | | | | |
| - Average for year | - Average for year | 153.1 |
| | 151.7 |
| | 142.4 |
| | 140.2 |
| | 135.3 |
| 288.4 |
| | 197.7 |
| | 153.2 |
| | 153.1 |
| | 151.7 |
|
| - At year-end | - At year-end | 153.2 |
| | 153.1 |
| | 142.5 |
| | 142.0 |
| | 135.5 |
| 297.4 |
| | 233.1 |
| | 153.6 |
| | 153.2 |
| | 153.1 |
|
| | | | | | | | | | | | | | | | | | | |
| Iron ore and coal production and sales statistics | | | | |
| (tons in millions - U.S. Iron Ore and North American Coal; metric tons in millions - Asia Pacific Iron Ore and Eastern Canadian Iron Ore) | |
| Iron ore production and sales statistics | | Iron ore production and sales statistics | | | |
| (long tons in millions - U.S. Iron Ore; metric tons in millions - Asia Pacific Iron Ore) | | (long tons in millions - U.S. Iron Ore; metric tons in millions - Asia Pacific Iron Ore) |
| Production tonnage - U.S. Iron Ore | Production tonnage - U.S. Iron Ore | 29.7 |
| | 27.2 |
| | 29.5 |
| | 31.0 |
| | 28.1 |
| 25.5 |
| | 23.4 |
| | 26.1 |
| | 29.7 |
| | 27.2 |
|
| - U.S. Iron Ore (Cliffs' share) | | 18.8 |
| | 16.0 |
| | 19.3 |
| | 22.4 |
| | 20.3 |
|
| - Asia Pacific Iron Ore | - Asia Pacific Iron Ore | 11.4 |
| | 11.1 |
| | 11.3 |
| | 8.9 |
| | 9.3 |
| 10.1 |
| | 11.8 |
| | 11.7 |
| | 11.4 |
| | 11.1 |
|
| - North American Coal | 7.5 |
| | 7.2 |
| | 6.4 |
| | 5.0 |
| | 3.2 |
| |
| - Eastern Canadian Iron Ore | 6.2 |
| | 8.7 |
| | 8.5 |
| | 6.9 |
| | 3.9 |
| |
| Production tonnage - (Cliffs' share) | | | | | | | | | | |
| - U.S. Iron Ore | 22.4 |
| | 20.3 |
| | 22.0 |
| | 23.7 |
| | 21.5 |
| |
| - Eastern Canadian Iron Ore | 6.2 |
| | 8.7 |
| | 8.5 |
| | 6.9 |
| | 3.9 |
| |
| Sales tonnage - U.S. Iron Ore | Sales tonnage - U.S. Iron Ore | 21.8 |
| | 21.3 |
| | 21.6 |
| | 24.2 |
| | 23.0 |
| 18.7 |
| | 18.2 |
| | 17.3 |
| | 21.8 |
| | 21.3 |
|
| - Asia Pacific Iron Ore | - Asia Pacific Iron Ore | 11.5 |
| | 11.0 |
| | 11.7 |
| | 8.6 |
| | 9.3 |
| 9.8 |
| | 11.6 |
| | 11.6 |
| | 11.5 |
| | 11.0 |
|
| - North American Coal | 7.4 |
| | 7.3 |
| | 6.5 |
| | 4.2 |
| | 3.3 |
| |
| - Eastern Canadian Iron Ore | 7.2 |
| | 8.6 |
| | 8.9 |
| | 7.4 |
| | 3.3 |
| |
|
| | | | | | | | | | | | | | | | | | | |
| | | * Management determined as of March 31, 2015, that our North American Coal operating segment met the criteria to be classified as held for sale under ASC 205, Presentation of Financial Statements. The North American Coal segment continued to meet the criteria throughout 2015 until we sold our North American Coal operations during the fourth quarter of 2015. As such, all current and historical North American Coal operating segment results are included in our financial statements and classified within discontinued operations. On January 27, 2015, we announced that Bloom Lake General Partner Limited and certain of its affiliates, including Cliffs Quebec Iron Mining ULC, which we refer to collectively as the Bloom Lake Group, commenced restructuring proceedings, in Montreal, Quebec under the CCAA to address the Bloom Lake Group's immediate liquidity issues and to preserve and protect its assets for the benefit of all stakeholders while restructuring and/or sale options were explored. At that time, the Bloom Lake Group was no longer generating revenues and was not able to meet its obligations as they came due. As part of the CCAA process, the court approved the appointment of a Monitor and certain other financial advisors. Additionally, on May 20, 2015, the Wabush Iron Co. Limited and Wabush Resources Inc., and certain of their affiliates, including Wabush Mines (an unincorporated joint venture of Wabush Iron Co. Limited and Wabush Resources Inc.), Arnaud Railway Company and Wabush Lake Railway Company, which we refer to collectively as the Wabush Group, commenced restructuring proceedings in Montreal, Quebec under the CCAA. The Wabush Group was no longer generating revenues and was not able to meet its obligations as they came due. As a result of this action, the protection granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate the reorganization of each of their businesses and operations. The Monitor appointed by the court in the CCAA proceeding for the Bloom Lake Group has also been appointed by the court as the Monitor in the CCAA proceeding for the Wabush Group. Financial results prior to the respective deconsolidations of the Bloom Lake and Wabush Groups and subsequent expenses directly associated with the Bloom Lake and Wabush Groups and certain other wholly-owned Canadian subsidiaries are included in our financial statements and classified within discontinued operations. |
* On July 10, 2012,(a) During 2017, we entered intoissued 63.25 million common shares in an underwritten public offering. We received net proceeds of $661.3 million at a definitive sharepublic offering price of $10.75 per common share. The net proceeds from the issuance of our common shares and asset salethe net proceeds from the issuance of $1.075 billion 5.75% 2025 Senior Notes were used to redeem in full all of our outstanding 8.25% 2020 First Lien Notes, 8.00% 2020 1.5 Lien Notes and 7.75% 2020 Second Lien Notes. Additionally, through tender offers, we purchased certain of our 5.90% 2020 Senior Notes, our 4.80% 2020 Senior Notes and our 4.875% 2021 Senior Notes. The aggregate principal amount outstanding of debt redeemed was $1.611 billion, which resulted in a loss on extinguishment of $165.4 million. During 2017, our ownership interest in Empire increased to 100% as we reached an agreement to sell our 45 percent economicdistribute the noncontrolling interest net assets of $132.7 million to ArcelorMittal, in exchange for its interest in Empire. We also acquired the Sonoma joint venture coal mine locatedremaining 15% equity interest in Queensland, Australia.Tilden Mining Company L.C. owned by United States Steel Corporation for $105.0 million. Prior to the end of the year Public Law 115–97, commonly known as the “Tax Cuts and Jobs Act”, was signed into law and among other items repeals the corporate AMT and will reduce the federal corporate tax rate to 21% for tax years beginning January 1, 2018. Along with the repeal of AMT, Public Law 115–97 provides that existing AMT credit carryovers are refundable beginning with the filing of the calendar year 2018 tax return. We have $235.3 million of AMT credit carryovers that are expected to be fully refunded between 2019 and 2022. |
| (b) During 2016, we recorded a net gain of $166.3 million related to debt restructuring activities that occurred throughout the year, including the issuance of $218.5 million aggregate principal of 8.00% 2020 1.5 Lien Notes in exchange for $512.2 of our existing senior notes, the issuance of an aggregate of 8.2 million common shares in exchange for $56.9 million aggregate principal amount of our existing senior notes and a loss on the redemption of the full $283.6 million outstanding of our 3.95% 2018 Senior Notes at a total redemption price of $301.0 million. We also issued 44.4 million common shares in an underwritten public offering. We received net proceeds of $287.6 million at a public offering price of $6.75 per common share. |
(c) On January 27, 2015, we announced the Bloom Lake Group commenced restructuring proceedings in Montreal, Quebec under the CCAA. Additionally, on September 27, 2011,May 20, 2015, the Wabush Group commenced restructuring proceedings in Montreal, Quebec under the CCAA. As a result of this action, the CCAA protections granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate the reorganization of each of their businesses and operations. Consistent with our strategy to extract maximum value from our current assets, on December 22, 2015, we announcedsold our plansequity interests in all the remaining North American Coal operations to ceaseSeneca. The sale included the Pinnacle mine in West Virginia and disposethe Oak Grove mine in Alabama. Additionally, Seneca may pay Cliffs an earn-out of up to $50 million contingent upon the terms of a revenue sharing agreement, which extends through the year 2020. As noted above, all current and historical North American Coal operating segment results are included in our financial statements and classified within discontinued operations. |
(d) During 2014, we recorded an impairment of goodwill and other long-lived assets of $635.5 million. The goodwill impairment charge of $73.5 million related to our Asia Pacific Iron Ore reporting unit. There were also other long-lived asset impairment charges of $562.0 million related to our continuing operations including the Asia Pacific Iron Ore operating segment and our Other reportable segments. The other long-lived asset impairment charges which related to our discontinued operations were $8,394.4 million related to our Wabush operation and Bloom Lake operation within our Eastern Canadian Iron Ore operating segment, and our CLCC thermal operation, Oak Grove operation and Pinnacle operation within our North American Coal operating segment, along with impairments charged to reporting units within our other reportable segments. The impairment charges were primarily a result of changes in life-of-mine cash flows due to declining pricing for both global iron ore and low-volatile metallurgical coal, which impacts our estimate of long-term pricing, along with changes in strategic focus including exploratory phases of possible divestiture of the operations atas the renewaFUEL biomass production facilitynew Chief Operating Decision Maker viewed Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal and Ferroalloys as non-core assets. The CLCC assets were sold in Michigan. On January 4, 2012, we entered into an agreementthe fourth quarter of 2014 on December 31, 2014, resulting in a loss on sale of $419.6 million. As noted above, all current and historical North American Coal operating segment results are included in our financial statements and classified within discontinued operations. |
(e) Upon performing our annual goodwill impairment test in the fourth quarter of 2013, a goodwill impairment charge of $80.9 million was recorded for our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment. We also recorded other long-lived asset impairment charges of $169.9 million, of which $154.6 million relates to sell the renewaFUELour Wabush reporting unit within our Eastern Canadian Iron Ore operating segment to reduce those assets to RNFL Acquisition LLC. Thetheir estimated fair value as of December 31, 2013. These reporting units were included within the entities under the CCAA filing. As noted above, financial results of operationsprior to the respective deconsolidations of the Sonoma joint ventureBloom Lake and renewaFUEL operationsWabush Groups and subsequent expenses directly associated with the Canadian Entities are reflected as discontinued operationsincluded in the accompanying consolidatedour financial statements for all periods presented.and classified within discontinued operations. |
(a)(f) On May 11, 2010,March 20, 2013, our Board of Directors increased our quarterly commondeclared a cash dividend of $13.6111 per preferred share, dividend from $0.0875which is equivalent to $0.14$0.34 per depositary share. The increased cash dividend was paid on JuneMay 1, 2010, September 1, 2010 and December 1, 2010 to shareholders on record as of May 14, 2010, August 13, 2010 and November 19, 2010, respectively. In addition, the increased cash dividend was paid on March 1, 2011 and June 1, 2011 to shareholders on record as of February 15, 2011 and April 29, 2011, respectively. On July 12, 2011, our Board of Directors increased the quarterly common share dividend by 100 percent to $0.28 per share. The increased cash dividend was paid on September 1, 2011, December 1, 2011 and March 1, 20122013, to our preferred shareholders onof record as of the close of business on AugustApril 15, 2011,2013. On May 7, 2013, September 9, 2013, and November 18, 2011 and February 15, 2012, respectively. On March 13, 2012,11, 2013, our Board of Directors increaseddeclared a quarterly cash dividend of $17.50 per preferred share, which is equivalent to $0.44 per depositary share. The cash dividends were paid on August 1, 2013, November 1, 2013, and February 3, 2014 to our preferred shareholders of record as of the close of business on July 15, 2013, October 15, 2013, and January 15, 2014, respectively. On February 11, 2014, May 13, 2014, September 8, 2014, and November 19, 2014, our Board of Directors declared a quarterly cash dividend of $17.50 per preferred share, which is equivalent to $0.44 per depositary share. The cash dividends were paid on May 1, 2014, August 1, 2014, November 3, 2014, and February 2, 2015, to our preferred shareholders of record as of the close of business on April 15, 2014, July 15, 2014, October 15, 2014, and January 15, 2015, respectively. On March 27, 2015, July 1, 2015, and September 10, 2015, our Board of Directors declared the quarterly commoncash dividend of $17.50 per preferred share, dividend by 123 percentwhich is equivalent to $0.625$0.44 per depositary share. The increased cash dividend was paid on JuneMay 1, 2012,2015, August 31, 20123, 2015, and December 3, 2012November 2, 2015 to our shareholders onof record as of the close of business on April 27, 2012, August 15, 20122015, July 15, 2015, and November 23, 2012,October 15, 2015, respectively. On January 4, 2016, we announced that our Board of Directors determined the final quarterly dividend of our preferred shares would not be paid in cash, but instead, pursuant to the terms of the preferred shares, the conversion rate was increased such that holders of the preferred shares received additional common shares in lieu of the accrued dividend at the time of the mandatory conversion of the preferred shares on February 1, 2016. The number of our common shares in the aggregate issued in lieu of the dividend was 1.3 million. This resulted in an effective conversion rate of 0.9052 common shares, rather than 0.8621 common shares, per depositary share, each representing 1/40th of a preferred share. Upon conversion on February 1, 2016, an aggregate of 26.5 million common shares were issued, representing 25.2 million common shares issuable upon conversion and 1.3 million that were issued in lieu of a final cash dividend. |
|
| | | | | | | | | | | | | | | | | | | |
(g) On February 11, 2013, our Board of Directors approved a reduction to our quarterly cash dividend rate by 76 percent76% to $0.15 per share. The decreased dividend of $0.15 per share was paid on March 1, 2013, June 3, 2013, September 3, 2013, and December 2, 2013 to our common shareholders of record as of the close of business on February 22, 2013, May 17, 2013, August 15, 2013, and November 22, 2013, respectively. Additionally, in 2014, the dividend of $0.15 per share was paid on March 3, 2014, June 3, 2014, September 2, 2014 and December 1, 2014 to our common shareholders of record as of the close of business on February 21, 2014, May 23, 2014, August 15, 2014, and November 15, 2014, respectively. |
(b) On January 27, 2010,26, 2015, we acquired all of the remaining outstanding shares of Freewest, including its interest in the Ring of Fire properties in Northern Ontario Canada. On February 1, 2010, we acquired entities from our former partnersannounced that held their respective interests in Wabush, thereby increasing our ownership interest from 26.8 percent to 100 percent. On July 30, 2010, we acquired all of the coal operations of privately owned INR, and since that date, the operations acquired from INR have been conducted through our wholly owned subsidiary known as CLCC. Results for 2010 include Freewest's, Wabush's and CLCC's results since the respective acquisition dates. As a result of acquiring the remaining ownership interest in Freewest and Wabush, our 2010 results were impacted by realized gains of $38.6 million primarily related to the increase in fair value of our previous ownership interest in each investment held prior to the business acquisition.
In December 2010, we completed a legal entity restructuring that resulted in a change to deferred tax liabilities of $78.0 million on certain foreign investments to a deferred tax asset of $9.4 million for tax basis in excess of book basis on foreign investments as of December 31, 2010. A valuation allowance of $9.4 million was recorded against this asset due to the uncertainty of realization. The deferred tax changes were recognized as a reduction to our income tax provision in 2010.
|
(c) On May 12, 2011, we completed our acquisition of Consolidated Thompson by acquiring all of the outstanding common shares of Consolidated Thompson for C$17.25 per share in an all-cash transaction including total debt less cash. Results for 2011 include the results for Consolidated Thompson since the acquisition date.
In 2011, during our annual goodwill impairment test in the fourth quarter, a goodwill impairment charge of $27.8 million was recorded for our CLCC reporting unit, within the North American Coal operating segment, impacting Other operating expense.
|
(d) Upon performing our annual goodwill impairment test in the fourth quarter of 2012, goodwill impairment charges of $997.3 million and $2.7 million were recorded for our CQIM and Wabush reporting units, respectively, both within the Eastern Canadian Iron Ore operating segment. We also recorded an impairment charge of $49.9 million related to our Eastern Canadian Iron Ore operations to reduce those assets to their estimated fair value as of December 31, 2012 due to the idling of the pelletizing facility at Pointe Noire. All of these charges impacted Other operating expense.
As a result of the approval for the sale of our 30 percent interest in Amapá, an impairment charge of $365.4 million was recorded through Equity income (loss) from ventures for the year ended December 31, 2012.
|
(e) On March 20, 2013, our Board of Directors declared a cashhad decided to eliminate the quarterly dividend of $13.6111$0.15 per preferred share which is equivalenton our common shares. The decision was applicable to approximately $0.34 per depositary share. The cash dividend was paid on May 1, 2013 to our preferred shareholders of record as of the close of business on April 15, 2013. On May 7, 2013, September 9, 2013, and November 11, 2013, our Board of Directors declared a quarterly cash dividend of $17.50 per preferred share, which is equivalent to approximately $0.44 per depositary share. The cash dividends were paid on August 1, 2013, November 1, 2013, and February 3, 2014 to our preferred shareholders of record as of the close of business on July 15, 2013, October 15, 2013, and January 15, 2014, respectively. The cash dividend was paid on May 1, 2013 to our preferred shareholders of record as of the close of business on April 15, 2013. On February 11, 2014, May 13, 2014, and September 8, 2014, our Board of Directors declared a quarterly cash dividend of $17.50 per preferred share, which is equivalent to approximately $0.44 per depositary share. The cash dividends were paid on May 1, 2014, August 1, 2014 and November 3, 2014, to our preferred shareholders of record as of the close of business on April 15, 2014, July 15, 2014, and October 15, 2014, respectively. On November 19, 2014, our Board of Directors declared a quarterly cash dividend of $17.50 per preferred share, which is equivalent to approximately $0.44 per depositary share. The cash dividend of $12.8 million will be paid on February 2, 2015 to our preferred shareholders of record as of the close of business on January 15, 2015. |
(f) Upon performing our annual goodwill impairment test in the fourthfirst quarter of 2013, a goodwill impairment charge of $80.9 million was recorded for our Cliffs Chromite Ontario2015 and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment. We also recorded other long-lived asset impairment charges of $169.9 million, of which $154.6 million relates to our Wabush reporting unit within our Eastern Canadian Iron Ore operating segment to reduce those assets to their estimated fair value as of December 31, 2013. All of these charges impacted Other operating expense.
|
(g) During 2014, we recorded an impairment of goodwill and other long-lived assets of $73.5 million and $8,956.4 million, respectively. The goodwill impairment charge of $73.5 million related to our Asia Pacific Iron Ore reporting unit. The other long-lived asset impairment charges of $8,956.4 million related to our Wabush operation and Bloom Lake operation within our Eastern Canadian Iron Ore operating segment, our Asia Pacific Iron Ore operating segment and our CLCC thermal operation, Oak Grove operation and Pinnacle operation within our North American Coal operating segment, along with impairments charged to reporting units within our Other reportable segments. The impairment charges were primarily a result of changes in life-of-mine cash flows due to declining pricing for both global iron ore and low-volatile metallurgical coal, which impacts our estimate of long-term pricing, along with changes in strategic focus including exploratory phases of possible divestiture of the operations as the new Chief Operating Decision Maker views Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal and Ferroalloys as non-core assets. The CLCC assets were sold in the fourth quarter of 2014 on December 31, 2014, resulting in a loss on sale of $419.6 million.
all subsequent quarters. |
|
| |
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and other factors that may affect our future results. The following discussion should be read in conjunction with the Consolidated Financial Statementsconsolidated financial statements and related notes that appear elsewhere in this document.
Industry Overview
The key driver of our business is demand for steelmaking raw materials from U.S. steelmakers. In 2014,During 2017, the U.S. produced approximately 8882 million metric tons of crude steel, making the U.S. the third largest producer in the world after China and Japan. This represents an approximate 2 percent increase in U.S. crude steel productionwhich is up 4% when compared to 2013.2016, or about 5% of total global crude steel production. U.S. total steel capacity utilization was approximately 77 percent in 2014 and 2013.74% during 2017, which is an approximate 3% increase from 2016. Additionally, in 2014,during 2017, China produced approximately 823832 million metric tons of crude steel, or approximately 50 percent50% of total global crude steel production. These figures represent an approximate 1 percent6% increase in Chinese crude steel production when compared to 2013. Average global total steel capacity utilization was about 77 percent in 2014, an approximate 2 percent decrease from 2013.2016. Throughout 2014,2017, global crude steel production grewincreased about 1 percent5% compared to 2013.
We expect economic growth in the U.S. to continue in 2015, and correspondingly expect steel demand to remain at healthy levels. While the industry demand will be supported by an improving housing market and a strengthened automotive sector, demand from energy companies is expected to decrease as oil prices remain at depressed levels. Additionally, the steel industry should face continued pressure from surging imports, which reached record levels in 2014, as the strength of the U.S. dollar continues to increase and continued oversupply of the global steel industry. In China, demand for steel should increase slightly compared to 2014, although at a rate far below growth percentages recorded earlier in the decade. In 2014, the increase in seaborne supply of iron ore was expected by many, but the slowdown in demand from Chinese end markets was unexpected and negatively impacted spot prices for iron ore. We expect seaborne iron ore prices to remain pressured unless there are vast structural changes to the supply/demand picture, including increased Chinese demand or iron ore capacity cuts.2016.
The global price of iron ore is influenced significantly by the worldwide supply of iron ore and by Chinese demand. The global supply of iron ore continues to increase, which has put downward pressure on current spot pricing. However, the impact of this volatility on our U.S. Iron Ore revenues is dampened because the pricing in our long-term contracts are mostly structured to minimize the short-term impact of the fluctuations in the seaborne iron ore price.
As a result of the long-term contracts, as discussed above, our U.S. Iron Ore revenues only experienced realized revenue rate decreases of 12 percent and 9 percent for the three months and year ended December 31, 2014, respectively, when compared to the comparable prior year periods versus the much higher decrease in Platts 62 percent Fe fines spot price. The Platts 62 percent Fe fines spot price decreased 45 percent62% Price increased 22% to an average price of $74$71 per metric ton for the three months ended December 31, 2014 compared to the respective quarter of 2013. In comparison, the year to date Platts 62 percent Fe fines spot pricing also has decreased 29 percent to an average price of $97 per ton during the year ended December 31, 2014. These large decreases2017 compared to 2016. Volatility in Platts 62 percent Fe fines spotthe iron ore price were driven by insufficient growth in Chinese demand to absorb the additional seaborne supply. The spot price volatility impacts our realized revenue rates particularlyat each of our segments to varying extents, but our revenue realizations are not fully correlated. Pricing mechanisms in our U.S. Iron Ore contracts reference this metric, but build in reasonable protection from swings in volatility. Asia Pacific Iron Ore revenue rates do not see a full correlation to the Platts 62% Price due to the discounts on the lower iron content of the ore sold there.
We recognize the volatility of iron ore supply-demand dynamics and Eastern Canadianthat changes in behaviors of the major iron ore producers and/or Chinese steelmakers could either lift or put pressure on iron ore prices in the near term. During 2017, we were generally pleased with both the signs of supply discipline from the major iron ore mining companies and record levels of Chinese steel production. We expect the healthy dynamics to continue through at least the beginning of 2018.
We have also noticed vastly improved demand for higher grade iron ore products, typically those of benchmark grade (62% iron content) and above, as Chinese mills put more emphasis on the productive and environmentally friendly nature of these ores. Assuming the margins at Chinese mills remain strong and the government continues to crack down on pollution, we believe that the mills will favor benchmark quality ore, placing additional pricing pressure on lower quality ore. This flight to quality has also manifested itself in increased pellet premiums throughout the world during 2017. The Atlantic Basin pellet premium, another important pricing factor in our U.S. Iron Ore business segments because their contracts, correlate heavily to world market spot pricing.
The metallurgical coal market continues to be in an oversupplied position due to increased supply from Australian producers. Those producers, benefiting from a devaluated local currency, are very competitive in European and South American markets. Recent reductions in global coal supply have yet to make an impact on pricing.
Consistent with the above, the quarterly benchmark price for premium low-volatile hard coking coal between Australian metallurgical coal suppliers and Japanese and Korean consumers decreased 21 percent to a full-year average of $126averaged $45 per metric ton in 2014 versus2017, a 42% increase compared to 2016. We believe this market will remain tight during 2018, thus supporting multi-year high premiums for pellet products.
The price for domestic hot-rolled coil steel, which is an important attribute in the 2013 full-year averagecalculation of $159supplemental revenue in one of our customer supply agreements, averaged $620 per metric ton. The benchmark pricingnet ton in 2017, 18% higher compared to last year. Despite the decrease in U.S. automobile demand this year, the domestic price environment has remained relatively flat fromrecovered due to supply-side discipline and improved U.S. manufacturing output. In addition, steel market reform in China has kept foreign steel prices high, thus making imports of hot-rolled coil steel into the second quarter of 2014 to the fourth quarter of 2014 at approximately $120 per metric ton.U.S. less attractive. As a result, we remain positive on our outlook for this market.
Our consolidated revenues were $2.3 billion and $2.1 billion for the years ended December 31, 20142017 and 2013 were $4.6 billion and $5.7 billion,2016, respectively, with net loss from continuing operations per diluted share of $47.52 and net income from continuing operations per diluted share of $2.36,$1.32 and $0.97, respectively. Net income in 2014from continuing operations for 2017 was impacted primarily by $9.0 billion of long-lived asset impairment recorded in the second half of 2014 along with $73.5 million of goodwill impairment recorded in the third quarter of 2014. Also, net income in 2014 waspositively impacted by lower market pricing for our products, which decreased
product revenues$252.4 million primarily as a result of tax reform legislation. In addition, sales margin increased by $1.0 billion for$112.4 million in the year ended December 31, 20142017 when compared to 2013. Results for the year were also impacted2016, primarily driven by the $419.6increase in revenue from higher overall average realized product revenue rates and higher sales volumes at our U.S. Iron Ore operations. Net income from continuing operations was negatively impacted as a result of losses on extinguishment of debt of $165.4 million loss on the sale of our CLCC assets in 2014. The CLCC assets were sold on December 31, 2014. Additionally, results for the year ended December 31, 2014 were2017, while the year ended December 31, 2016 was positively impacted negatively by $96.3 million related toas a litigation judgment against the Bloom Lake Group, $92.6 millionresult of minimum shipment penalties and $90.7 milliongains on extinguishment/restructuring of Wabush idle costs. Net income in 2013 was impacted negatively by $154.6 milliondebt of other long-lived asset impairment charges related to our Wabush operations within our Eastern Canadian Iron Ore operating segment, an $80.9 million goodwill impairment charge related to our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment and reported in our Other reportable segments and a $67.6 million asset impairment charge related to our investment in Amapá. This was offset by lower exploration spending in 2013, primarily related to the Chromite project.$166.3 million.
Strategy
Re-focusing the CompanyWe are Focused on Protecting our Core U.S. Iron Ore Business
We have shifted from a diversification based strategy to one that focuses on strengthening our U.S. Iron Ore operations. We are the market-leading iron ore producer in the U.S., supplying differentiated iron ore pellets under long-term contracts someto major North American blast furnace steel producers. We have the unique advantage of which begin to expirebeing a low-cost, high-quality producer of iron ore pellets in the end of 2016,Great Lakes market with significant transportation and logistics advantages to serve the largest U.S.Great Lakes steel producers. Pricing protectionsmarket effectively. The pricing structure and long-term supply, certainty provided bynature of our existing contracts, andalong with our low-cost operating profile, positionsposition U.S. Iron Ore as a strong cash flow generator in most commodity pricing environments. Since instituting our most stablestrategy in 2014 of focusing on this core business, we have achieved significant accomplishments, including providing volume certainty by signing a ten-year supply agreement with our largest customer; substantially reducing operating costs by making operational improvements; and profitable business. developing new pellet products to meet ever-evolving market demands.
We expect to continue to strengthenrecognize the importance of our strength in the U.S. Iron Ore cost operating profile throughbusiness, and our operational expertisetop strategic priority is to protect and disciplined capital allocation policies.enhance our market position. This involves continuing to deliver high-quality, custom-made pellets that allow our customers to remain competitive in the quality, production efficiency, and environmental friendliness of their steel products. Protecting the core business also involves continually evaluating opportunities to expand both our production capacity and ore reserve life. In 2017, we achieved key accomplishments toward these goals by acquiring the remaining minority stake in our Tilden and Empire mines as well as additional real estate interests in Minnesota.
Reviewing All Other Businesses for Either Optimization, Divestiture or ShutdownExpanding our Customer Base
While we hold a strong market position in supplying iron ore to Great Lakes blast furnaces, we cannot ignore the ongoing shift of steelmaking share in the U.S. away from our core blast furnace customers to EAF steelmakers. Over the past 25 years, the market share of EAFs has nearly doubled. However, as EAFs have moved to higher value steel products, they require more high-quality iron ore-based metallics instead of scrap as raw material feedstock. As an extensiona result of this trend, one of our re-focused U.S. Iron Ore strategy,top strategic priorities is to become a critical supplier of the EAF market by providing these specialized metallics. In June 2017, we continueannounced the planned construction of an HBI production plant in Toledo, Ohio. HBI is a specialized high-quality iron alternative to consider further divestituresscrap that, when used as a feedstock, allows the EAF to produce more valuable grades of Eastern Canadian Iron Ore,steel. We expect our HBI to partially replace the over 3 million metric tons of ore-based metallics that are imported into the Great Lakes every year from Russia, Ukraine, Brazil and Venezuela.
Our Toledo plant is expected to produce HBI at a rate of 1.6 million metric tons per year when brought to production in 2020. We expect that this will create additional demand for our DR-grade pellets of 2.5 million long tons. Not only does this production plant create another outlet for our high-margin pellets, but it also presents an attractive economic opportunity for us. As the only producer of DR-grade pellets in the Great Lakes and with access to abundant, low-cost natural gas, we will be in a unique position to serve clients in the region. In addition, the Toledo site is in close proximity to over 20 EAFs, giving us a natural competitive freight advantage over import competitors.
Optimized, Divested or Shut Down All Non-Core Business Segments
Given the current price discounting environment for low-grade iron ore products containing less than 62% Fe, we are focused on optimizing the remaining ore reserve base of our Asia Pacific Iron Ore and North American Coal businesses.business. We believewill continue to operate Asia Pacific Iron Ore with very low total capital expenditures until we cease mining operations, which we expect to occur at some point during 2018.
Restructuring proceedings were commenced under the assets from these non-core segments have value and will only consummate a transaction where we believeCCAA for the price fairly and adequately represents such value. For more information regarding the status of our divestitureBloom Lake Group, part of our Eastern Canadian Iron Ore businesses, in the first quarter of 2015. During the second quarter of 2015, the CCAA protection granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate the reorganization of each of their businesses and operations. As of December 31, 2017, CCAA proceedings are still ongoing. The Monitor appointed by the court in the CCAA proceedings for the Bloom Lake Group and the Wabush Group has conducted a claims process pursuant to which creditors have filed claims against the Bloom Lake Group and the Wabush Group. The Monitor is reviewing all claims filed as part of this claims process. Currently, there is uncertainty as to the amount of the distribution that will be made to the creditors of the Bloom Lake Group and the Wabush Group, including, if any, to us, and whether we could be held liable for claims that may be asserted by or on behalf of the Bloom Lake Group or the Wabush Group or by their respective representatives against non-debtor affiliates of the Bloom Lake Group and the Wabush Group. During 2017, we became aware that it was probable the Monitor will assert a preference claim against us and/or certain of our affiliates. Given that it is probable the claim will be asserted by the Monitor, we have recorded an estimated liability of $55.6 million, which includes the value of our related-party claims against the Bloom Lake Group and the Wabush Group. Should the Monitor proceed to assert the claim, we believe the Monitor will demand an amount in excess of the
value of our related-party claims against the Bloom Lake Group and the Wabush Group. Thus, it is possible that a change in the estimated liability may occur in the future. We deny liability for any amount and will vigorously defend such claim.
On December 22, 2015, we closed the sale of our remaining North American Coal business, see "Recent Developments" below.
Asia Pacificwhich included the Pinnacle mine in West Virginia and the Oak Grove mine in Alabama, to Seneca. The sale marked our exit from the coal business and represented another very important step in the implementation of our U.S. Iron Ore is a well-recognized and reliable supplierpellet-centric strategy. Prior to steelmakers in Asia. To date, Asia Pacific Iron Ore has been a steady cash flow contributor, benefiting from a premium price for its high lump iron ore mix and minimal required capital expenditures to maintain production. We look to operatethis sale, it was determined by management as of March 31, 2015 that our North American Coal business at breakeven levelsoperating segment met the criteria to be classified as held for sale under ASC 205, Presentation of EBITDA generation in 2015 given the current environment for high quality metallurgical coal. We are focused on limiting capital expenditures while continuing to meet environmental, safety and permission to operate requirements.Financial Statements.
Maintaining Discipline on Costs and Capital Spending and Improving our Financial Flexibility
We believe our ability to execute our strategy is dependent on our improving financial position, balance sheet strength and financial flexibility, which will enable us to manage through the inherent cyclical demand for our products and volatility in commodity prices. We have developed a highly disciplined financialOur streamlined organization and capital expenditure plan with a focus on improving our cost profile and increasing long-term profitability. We are focused on sizing our organization to better fit our new strategic direction and streamlining our businesses’ support functions by eliminating duplication.are well-aligned to best serve our strategic direction. Our capital allocation plan is focused on strengthening and protecting our core U.S. Iron Ore operations to promote greater free cash flow generation.and expanding our customer base.
As the implementation of our strategy has strengthened the business, we have put additional emphasis on the continued improvement of our balance sheet via continued reduction of long-term debt. Since the middle of 2014, we have reduced the principal of our debt by 15% and decreased our average cost of debt to 5% by using various liability management strategies consistent with our capital allocation priorities and our stated objective of improving the strength of our balance sheet and simplifying the capital structure. Given the cyclical nature of our business, we will continue to be opportunistic in managing our balance sheet and capital structure, which will put us in an optimal position to manage through any commodity environment, and we continue to seek the best opportunities to accomplish this.
Competitive Strengths
HighlyStable and Resilient U.S. Iron Ore Operations
Our U.S. Iron Ore segment is the core focus of our business strategy. The U.S. Iron Ore segment is the primary contributor to our consolidated results, generating 54 percent and 89 percent$1,866.0 million of consolidated revenue and $559.4 million of consolidated Adjusted EBITDA respectively, for the year ended December 31, 2014.2017. U.S. Iron Ore produces differentiated iron ore pellets that are customized for use in customers’ blast furnaces as part of the steelmaking process. The grades of pellets currently delivered to each customer are based on that customer’s preferences, which depend in part on the characteristics of the customer’s blast furnace operation. We believe our long history of supplying customized pellets to the U.S. steel producers has resulted in a co-dependencyco-dependent relationship between us and our customers. This technical and operational co-dependency has positioned Cliffsenabled us to claim a substantial portion of the total U.S. iron ore market. Based on Cliffs’our equity ownership in itsour U.S. mines, Cliffs’our share of the annual rated production capacity is 25.521.2 million long tons, representing 44 percent42% of total U.S. annual pellet capacity. Long-lived assets with an average mine life of approximately 30 years provide the opportunity to maintain our significant market position well into the future.
We believe U.S. Iron Ore is uniquely positioned in the global iron ore market due to its reducedmuted exposure to seaborne iron ore pricing. More than half of U.S. Iron Ore production is sold through stable long-term contracts that are
structured with various formula-based pricing mechanisms that mitigatesreference spot iron ore pricing, domestic steel prices, and Atlantic-based pellet premiums, among other items, and mitigate the impact of seaborneany one factor's price volatility on our business. Additionally, certain of our supply agreements have a provision that limits the amount of price increases or decreases in any given year. The impact of the pricing protections from our contracts is clearly evidenced in our U.S. Iron Ore financial performance. U.S. Iron Ore’s realized revenue rate decreased 12 percent and 9 percent for the three months and year ended December 31, 2014, respectively, compared to a 45 percent and 29 percent decline in the Platts 62 percent Fe fines spot price over the same periods.
In addition, we maintain materially lower costsa freight advantage compared to our competition as a result of our proximity to U.S. steelmaking operations. The Great Lakes market is largely isolated and difficult to enter. Our costs are lower as a result of inherent transportation advantages associated with our mine locations near the Great Lakes, which allows for transportation via railroads and loading ports. U.S. Iron Ore mines also benefit from on-site pellet production and ore production facilities located a short distance from the mines. These advantages translated to a cash production costs in the three months and year ended December 31, 2014 of $59 per ton and $64 per ton, respectively, which included the cost to mine, concentrate and pelletize, certain transportation costs and site administration costs.
Competitive Asia Pacific Iron Ore Operations
Although our annual production tonnage is substantially less than our competitors in the seaborne market, the Asia Pacific Iron Ore business maintains a competitive position with the major Australian iron ore producers. We produce a product mix of approximately 52 percent lump ore and 48 percent fines, which is a significantly higher lump mix than the major producers in Australia. This lump ore currently commands a premium in the seaborne market over iron ore fines.
Further, our Asia Pacific Iron Ore segment is a cost competitive producer and requires modest ongoing sustaining capital expenditures to continue our operations. Cash production costs during the three months and year ended December 31, 2014, were $43 per ton and $49 per ton, respectively. Over the remaining life of the mine, the capital expenditure requirements are estimated to be approximately $50 million or $1 per ton.
Recent Developments
Eastern Canadian Iron Ore
Our Wabush Scully mine in NewfoundlandOn December 22, 2017, President Trump signed into law “Public Law 115–97”, commonly known as the “Tax Cuts and Labrador was idled byJobs Act”, which, among other things, repeals the endcorporate AMT and will reduce the federal corporate tax rate to 21% for tax years beginning January 1, 2018. Along with the repeal of AMT, Public Law 115–97 provides that existing AMT credit carryovers are refundable beginning with the filing of the first quartercalendar year 2018 tax return. We have $235.3 million of 2014AMT credit carryovers that are expected to be fully refunded between 2019 and subsequently began2022. The tax reform legislation is a comprehensive bill containing several other provisions, such as limitations on the deductibility of interest expense and certain executive compensation, that are not expected to commence permanent closurehave a material effect on us due to our large net operating loss position, our ability to access the historic losses with no limitations as described in Public Law 115–97, and our full
valuation allowance position. The ultimate impact of the tax reform legislation may differ from our current estimates due to changes in the fourth quarter of 2014. With costs unsustainably high, it was not economically viable to continue running this operation. Approximately 500 employees at both the Wabush Scully mineinterpretations and the Pointe Noire rail and port operation in Québec were impacted by these actions.
On November 19, 2014, we announcedassumptions made as well as additional regulatory guidance that we were pursuing exit options for our Eastern Canadian Iron Ore operations.may be issued.
During the fourth quarter of 2014,2017, we disclosed that, despite our cost-cutting progress at our Bloom Lake mine, we concluded that Phase I alone was not economically feasible based on our current operating plans. For the Bloom Lake mine to be profitable, we concluded that Phase IIcompleted an acquisition of the Bloom Lake mine must be developed to reduce the overall cash costcertain real estate interests located in Itasca County west of operations. We could only develop Phase II of the Bloom Lake mine if we had been able to secure new equity partners to share in the capital costs, which we estimated to be approximately $1.2 billion. As the new equity partners were unable to commit within the short timeframe we required, we determined that the Phase II expansion of the Bloom Lake mine was no longer a viable option for us and we shifted our focus to considering available possibilities and executing an exit option for Eastern CanadianNashwauk, Minnesota from Glacier Park Iron Ore operations that minimized the cash outflowsProperties LLC. The interests include a combination of undivided and associated liabilities. In December 2014, iron ore production at the Bloom Lake mine was suspended and the Bloom Lake mine was placed in ‘‘care-and-maintenance’’ mode.
On January 27, 2015, we announced that the Bloom Lake Group commenced restructuring proceedings in Montreal, Québec, under the CCAA. The Bloom Lake Group had recently suspended operations and for several months we were exploring options to sell certain of our Canadian assets, among other initiatives. The decision to seek protection under the CCAA was based on a thorough legal and financial analysis of the options available to the Bloom Lake Group. The Bloom Lake Group was no longer generating any revenues and was not able to meet its obligations as they came due. The initial CCAA order addressed the Bloom Lake Group's immediate liquidity issues and permits the Bloom Lake Group to preserve and protect its assets for the benefit of all stakeholders while restructuring and sale options are explored. As part of the CCAA process, the Court has appointed FTI Consulting Canada Inc. as the Monitor. The Monitor's role in the CCAA process is to monitor the activities of the Bloom Lake Group and provide assistance to the Bloom Lake Group and its stakeholders in respect of the CCAA process.
Worldlink Arbitration
In October 2011, our wholly owned subsidiary, CQIM, along with Bloom Lake General Partner Limited and The Bloom Lake Iron Ore Mine Limited Partnership, instituted an arbitration claim against the Bloom Lake mine’s former customer, Worldlink Resources Limited, for material and/or fundamental breaches of the parties’ 2007 offtake agreement for the purchase and sale of iron concentrate produced at the Bloom Lake mine. Our subsidiaries filed the arbitration claim with the International Court of Arbitration of the International Chamber of Commerce pursuant to the dispute resolution provisions of the offtake agreement. Our subsidiaries terminated the offtake agreement with Worldlink in August 2011 due to Worldlink’s failure to fulfill its obligations under the agreement and Worldlink’s demand to renegotiate the price of the iron ore concentrate in spite of being party to a long-term offtake agreement. Our subsidiaries claimed damages for the breach of the offtake agreement in excess of $85 million, and Worldlink counterclaimed for damages in excess of $100 million. In November 2014, the arbitrators decided in favor of Worldlink and awarded it damages in an amount of approximately $71 millionwhole fee interests as well as mineral and surface leases, all lying within the Biwabik Iron Formation. The acreage acquired is approximately $25553 acres and the acreage being leased is approximately 3,215 acres.
We completed an issuance of $400.0 million aggregate principal amount of 4.875% 2024 Senior Secured Notes in accrued interesta private transaction exempt from the date of terminationregistration requirements of the offtake agreement in August 2011 and arbitration costs. This judgment has been included in the CCAA filing of the Bloom Lake and will be treated as an unsecured claim.
CLCC
On December 2, 2014, we entered into a definitive agreement to sell our CLCC assets in southern West Virginia to Coronado Coal II, LLC for $174 million in cash as well as the assumption of certain liabilities, of which $155 million has been collected as of December 31, 2014. The sale closedSecurities Act on December 31, 2014.
The CLCC assets, which19, 2017. In addition, we acquired in 2010, included two underground high-volatile metallurgical coal mines, Powellton No. 1 and Lower War Eagle, and the Toney Fork No. 2 surface thermal coal mine. The facilities included a coal preparation and processing plant and a train batch-weight load-out facility with access to rail. In 2014, the CLCC operations produced 1.5issued $316.25 million tons of metallurgical coal out of the 6.6 million total tons of metallurgical coal North American Coal produced for us, and the CLCC operations also produced 0.9 million tons of thermal coal. In 2013, the CLCC operations produced 1.5 million tons of metallurgical coal out of the 6.6 million total tons of the metallurgical coal North American Coal produced for us, and the CLCC operations also produced 0.6 million tons of thermal coal.
We recorded a loss on the sale of CLCC assets of approximately $419.6 million on a pre-tax basis in the fourth quarter of 2014.
Share Buyback
On August 25, 2014, the Board of Directors authorized us to buy back our outstanding common shares in the open market or in private negotiated transactions up to a maximum of $200 million. At that time, we obtained approval from our bank group to ensure the buyback program could be effectively implemented in a timely manner. The Company is not obligated to make any purchases under the buyback program and it may be suspended or discontinued by the Company at any time. No shares have been purchased through December 31, 2014. The authorization is active until December 31, 2015.
Credit Facility Amendments
On October 24, 2014, we entered into an agreement to amend our existing revolving credit agreement (Amendment No. 5). The amended terms remove the current maximum balance sheet leverage ratio of debt to capitalization of less than 45 percent, which was a covenant introduced in June 2014, and replaced that covenant with a maximum leverage ratio covenant of secured debt to EBITDA that is not to exceed 3.5 times. The minimum interest coverage ratio requirement of 3.5 times was subsequently reduced to 2.0 times upon completion of certain collateral actions within 60 days of the execution of the amendment. The collateral requirements were satisfied as of December 23, 2014. The amendment also reduced the size of the existing facility from $1.250 billion to $1.125 billion and included a security agreement.
On January 22, 2015, we entered into an agreement to further amend our existing revolving credit agreement (Amendment No. 6). The further amended terms waived the event of default related to a CCAA filing for Canadian entities. The CCAA filing for our Bloom Lake Group was made subsequent to the effectiveness of this amendment. The amendment also reduced the size of the existing facility from $1.125 billion to $900 million, with a further reduction to $750 million on May 31, 2015.
Each of these amendments to our credit agreement facilitate financial flexibility for us to execute our strategy and provide us a consistent source of liquidity. Refer to NOTE 5 - DEBT AND CREDIT FACILITIES and NOTE 21 - SUBSEQUENT EVENTSfor further details of the amendments.
Debt
During the fourth quarter, we announced a tender offer to purchase our public debt at discounts, as well as a new secured notes offering, driven by our desire to pay down debt. However, the tender offers were terminated because our debt refinancing was postponed due to perceived adverse market conditions. After the postponement, we used our liquidity to execute the repurchase of our senior notes in the open market. During the fourth quarter 2014, we were able to pay down $300 million in aggregate principal in total debt less cash. Byamount of 1.50% 2025 Convertible Senior Notes. We intend to use the end of the year, we had total debt less cash of $2.7 billion, with total debt of $3.0 billion, zero drawn on our revolving credit facility, and $291.0 million of cash and cash equivalents. In January 2015, we further reduced total debt by approximately $159 million through senior note repurchases in the open market with approximately $106 million of net proceeds from these offerings to fund a substantial portion of our HBI project in Toledo, Ohio, for upgrades at the saleNorthshore plant to enable it to produce significantly increased levels of CLCCDR-grade pellets that could be used as feedstock for the HBI production plant and/or sold commercially and cash from operations.general corporate purposes.
Business Segments
OurThe Company’s primary continuing operations are organized and managed according to product category and geographic location: U.S. Iron Ore and Asia Pacific Iron Ore, North American Coal and Eastern Canadian Iron Ore.
Results of Operations – Consolidated
20142017 Compared to 20132016
On January 25, 2018, we furnished a Current Report on Form 8-K to the SEC that included a news release issued that same day announcing the fourth-quarter and full-year financial results for the period ended December 31, 2017, which was furnished as Exhibit 99.1 thereto (the Earnings Release). The Earnings Release reported: (a) net income attributable to Cliffs shareholders of $317.8 million and $374.9 million; (b) earnings per common share attributable to Cliffs shareholders - diluted of $1.05 and $1.28; and (c) Adjusted EBITDA of $129.2 million and $512.8 million, each for the three and twelve months ended December 31, 2017. The Statements of Consolidated Operations and accompanying notes in this Annual Report on Form 10-K reports (a) net income attributable to Cliffs shareholders of $309.9 million and $367.0 million; (b) earnings per common share attributable to Cliffs shareholders - diluted of $1.03 and $1.26; and (c) Adjusted EBITDA of $121.3 million and $504.9 million, each for the three and twelve months ended December 31, 2017. Subsequent to the Earnings Release, we determined that the ARO liability recorded at Asia Pacific Iron Ore did not adequately reflect that expected costs to be incurred at the end of mine life. Accordingly, we recorded an entry to fully reflect the estimated ARO cost.
The following is a summary of our consolidated results of operations for the years ended December 31, 20142017 and 2013:2016:
| | | | (In Millions) | (In Millions) |
| | 2014 | | 2013 | | Variance Favorable/ (Unfavorable) | 2017 | | 2016 | | Variance Favorable/ (Unfavorable) |
| Revenues from product sales and services | $ | 4,623.7 |
| | $ | 5,691.4 |
| | $ | (1,067.7 | ) | $ | 2,330.2 |
| | $ | 2,109.0 |
| | $ | 221.2 |
|
| Cost of goods sold and operating expenses | (4,172.3 | ) | | (4,542.1 | ) | | 369.8 |
| (1,828.5 | ) | | (1,719.7 | ) | | (108.8 | ) |
| Sales margin | $ | 451.4 |
| | $ | 1,149.3 |
| | $ | (697.9 | ) | $ | 501.7 |
| | $ | 389.3 |
| | $ | 112.4 |
|
| Sales margin % | 9.8 | % | | 20.2 | % | | (10.4 | )% | 21.5 | % | | 18.5 | % | | 3.0 | % |
Revenues from Product Sales and Services
Sales revenue for the year ended December 31, 2014 decreased $1,067.7Revenues from product sales and services increased by $175.7 million or 18.8 percent, from 2013. The decrease in sales revenue during 2014 compared to 2013 was primarily attributable to the decrease in market pricing for our products, which impacted revenues by $1.0 billion for the year ended December 31, 2014.
Changes in world market pricing impacts our revenues each year. During 2014, iron ore revenues were impacted primarily by the decrease in the Platts 62 percent Fe fines spot price, which declined 28.5 percent to an average price of $97 per ton, resulting in decreased revenues of $830.8 million,9.2%, excluding the impact of Wabush tons sold. The decrease in our realized revenue rates during 2014 compared to 2013 was 9.5 percent, 32.8 percent and 26.7 percent for our U.S. Iron Ore, Asia Pacific Iron Ore and Eastern Canadian Iron Ore operations, respectively. Also, the decision to idle Wabush impacted the period-over-period revenues negatively by $288.0 million. Furthermore, during 2014, our North American Coal business segment experienced continued downward pricing pressures, which negatively impacted revenues by $176.8 million and decreased our realized revenue rate by 23.6 percent. Partially offsetting these decreases was an increase in revenues period-over-period as a resultfreight and reimbursements of higher iron ore and coal sales volumes of $183.5$45.5 million, for the year ended December 31, 2014.2017 compared to the prior year, which was driven by an increase in realized revenue rate of 16.3% or $228.2 million and increased iron ore sales volumes of 0.5 million long tons or $36.7 million from our U.S. Iron Ore operations compared to the prior year. These increases were offset partially by the decrease in sales volume of 1.8 million metric tons or $81.0 million and a decrease in realized revenue rate of 1.2% or $4.9 million from our Asia Pacific Iron Ore operations compared to the prior year.
Refer to “Results of Operations – Segment Information" for additional information regarding the specific factors that impacted revenue during the period.
Cost of Goods Sold and Operating Expenses
Cost of goods sold and operating expenses for the years ended December 31, 2014 and 2013 were $4,172.3 million and $4,542.1 million, respectively, a decrease of $369.8 increased by $63.3 million or 8.1 percent year-over-year.
Cost of goods sold and operating expenses for4.2%, excluding the year ended December 31, 2014 decreased as costs were impacted positively as a result of the Wabush idle that occurred during the second quarter of 2014, which reduced costs by $304.4 million period-over-period. Operational efficiencies and cost cutting efforts across all of our business units have reduced costs for the year ended December 31, 2014 by $217.0 million. Also, as a result of favorable foreign exchange rates in 2014 versus 2013, we realized lower costs of $93.8 million. Partially offsetting these decreases were an increase in costs period-over-period as a resultfreight and reimbursements of higher iron ore and coal sales volumes of $141.6$45.5 million, for the year ended December 31, 2014. Additionally, we incurred2017 compared to the prior year, which was primarily due to increased production cost rates across all operations that resulted in increased costs of $157.0 million and increased sales volumes from our U.S. Iron Ore operations that resulted in $18.4 million of additional costs. These increases were offset partially by incrementally higher lower-of-cost-or-market inventory chargeslower idle costs in our U.S. Iron Ore operations of $56.8$54.7 million and lower iron ore sales volumes from our Asia Pacific Iron Ore operations for the year ended December 31, 2014, as a result2017 compared to the prior year that resulted in lower costs of the continued downward pricing pressure.$69.3 million.
Refer to “Results of Operations – Segment Information” for additional information regarding the specific factors that impacted our operating results during the period.
Other Operating Income (Expense)
The following is a summary of otherOther operating income (expense) for the years ended December 31, 20142017 and 2013:2016:
|
| | | | | | | | | | | |
| | (In Millions) |
| | 2014 | | 2013 | | Variance Favorable/ (Unfavorable) |
| Selling, general and administrative expenses | $ | (208.7 | ) | | $ | (231.6 | ) | | $ | 22.9 |
|
| Exploration costs | (8.8 | ) | | (59.0 | ) | | 50.2 |
|
| Impairment of goodwill and other long-lived assets | (9,029.9 | ) | | (250.8 | ) | | (8,779.1 | ) |
| Gain (loss) on disposal of assets | (423.0 | ) | | 16.7 |
| | (439.7 | ) |
| Miscellaneous - net | (226.3 | ) | | 46.4 |
| | (272.7 | ) |
| | $ | (9,896.7 | ) | | $ | (478.3 | ) | | $ | (9,418.4 | ) |
|
| | | | | | | | | | | |
| | (In Millions) |
| | 2017 | | 2016 | | Variance Favorable/ (Unfavorable) |
| Selling, general and administrative expenses | $ | (105.8 | ) | | $ | (117.8 | ) | | $ | 12.0 |
|
| Miscellaneous - net | 27.7 |
| | (30.7 | ) | | 58.4 |
|
| | $ | (78.1 | ) | | $ | (148.5 | ) | | $ | 70.4 |
|
Selling, general and administrative expenses during the year ended December 31, 20142017 decreased $22.9$12.0 million over 2013.2016. The favorable variance for the year ended December 31, 20142017 was favorably impacteddriven by $37.2a $4.1 million decrease in incentive compensation and $3.5 million of union signing bonuses in 2016, which were not repeated in the 2017. In addition, external services costs, excluding costs for employment costs related to cost savings actions and reduced year-over-year expense of $10.5 million related to pension and other postemployment benefits. Offsetting these cost reductions was an increase in costs related to the proxy contest and the change in control of the majority of our Board of Directors. We incurred substantial costs associated with various advisors, including bankers, attorneys and others. Costs associated with these events were approximately $26.6early stage HBI project spending, decreased by $5.4 million for the year ended December 31, 2014.2017 compared to the prior year. These favorable variances were offset partially by early-stage HBI project spending of $2.3 million.
Exploration costs decreased by $50.2 million during the year ended December 31, 2014 from 2013, primarily due to decreases in costs at our Ferroalloys operations and Global Exploration Group operations. Ferroalloys and the Global Exploration Group are reported within our Other reportable segments. Our Ferroalloys operating segment had cost decreases of $38.8 million in 2014 over 2013 due to the decision made in the fourth quarter of 2013 to indefinitely suspend the Chromite Project and to not allocate additional capital for the project given the uncertain timeline and risks associated with the development of necessary infrastructure to bring the project online. Our Global Exploration Group had cost decreases of $8.0 million in 2014 over 2013, due to lower overhead and professional services spend. In alignment with our capital allocation strategy, we anticipate minimal levels of exploration spending to continue in 2015 and beyond.
Impairment of goodwill and other long-lived assets were $9,029.9 million and $250.8 million during the years endedDecember 31, 2014 and 2013, respectively. During the year endedDecember 31, 2014, we recorded goodwill impairment of $73.5 million related to our Asia Pacific Iron Ore reporting unit. We also recorded other long-lived asset impairment charges of $8,956.4 millionduring 2014. The charges are related to our Wabush mine and Bloom Lake mine within our Eastern Canadian Iron Ore operating segment, our Asia Pacific Iron Ore operating segment and our CLCC thermal operation, which was sold during the fourth quarter of 2014, Oak Grove operation and Pinnacle operation within our North American Coal operating segment, along with impairments charged to reporting units within our Other reportable segments. The impairment charges were primarily a result of management determining that the carrying value of the asset groups may not be recoverable primarily due to long-term price forecasts as part of management’s long-range planning process. Updated estimates of long-term prices for all products, specifically the Platts 62 percent Fe fines spot price, which particularly effects Eastern Canadian Iron Ore and Asia Pacific Iron Ore business segments because their contracts correlate heavily to world market spot pricing, and the benchmark price for premium low-volatile hard coking coal were lower than prior estimates. These estimates were updated based upon current market conditions, macro-
economic factors influencing the balance of supply and demand for our products and expectations for future cost and capital expenditure requirements. Additionally, a new CEO, Lourenco Goncalves, was appointed by the Board of Directors in early August 2014 and subsequently identified as the CODM in accordance with ASC 280, Segment Reporting. The new CODM views Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal and Ferroalloys as non-core assets and has communicated plans to evaluate the business units for a change in strategy including possible divestiture. These factors, among other considerations utilized in the individual impairment assessments, indicate that the carrying value of the respective asset groups and Asia Pacific Iron Ore goodwill may not be recoverable. Refer to NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.
During the fourth quarter of 2013, we continued to experience higher than expected production costs and operational inefficiencies at our Wabush operations within our Eastern Canadian Iron Ore operating segment that have resulted in continued declines in our profitability of that business, which represents an asset group for purposes of testing our long-lived assets for recoverability. Driven by the unsustainable high cost structure, which was not economically viable to continue running the operations, we announced on February 11, 2014, the decision to idle the production of our Wabush Scully mine by the end of the first quarter and began to implement the permanent closure plan for the mine. Upon completion of an impairment analysis, it was determined the fair value was less than the carrying value of the asset group, which resulted in an impairment of other long-lived assets of $154.6 million at December 31, 2013.
Additionally during the fourth quarter of 2013, a goodwill impairment charge of $80.9 million was recorded for our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment. Ferroalloys and the Global Exploration Group are reported within our Other reportable segments. The goodwill impairment charge was primarily a result of the decision to indefinitely suspend the Chromite Project and to not allocate additional capital for the project given the uncertain timeline and risks associated with the development of necessary infrastructure to bring the project online.
Net loss on disposal of assets was $423.0 million during the year ended December 31, 2014, compared to a net gain on disposal of assets of $16.7 million in 2013. The net loss on disposal of assets for 2014 was primarily attributable to the loss of $419.6 million incurred on the sale of our CLCC assets.
The following is a summary of Miscellaneous - net for the years ended December 31, 2017 and 2016:
|
| | | | | | | | | | | |
| | (In Millions) |
| | 2017 | | 2016 | | Variance
Favorable/
(Unfavorable) |
| Foreign exchange remeasurement | $ | 11.4 |
| | $ | (16.8 | ) | | $ | 28.2 |
|
| Michigan Electricity Matters accrual | 1.3 |
| | (12.4 | ) | | 13.7 |
|
| Management and royalty fees | 5.1 |
| | 9.0 |
| | (3.9 | ) |
| Empire idle costs | 5.0 |
| | (8.2 | ) | | 13.2 |
|
| Gain (loss) on disposal of assets | 0.9 |
| | (4.8 | ) | | 5.7 |
|
| Other | 4.0 |
| | 2.5 |
| | 1.5 |
|
| | $ | 27.7 |
| | $ | (30.7 | ) | | $ | 58.4 |
|
For the year ended December 31, 2017, there was an incrementally favorable impact of $28.2 million driven by the change in foreign exchange remeasurement of short-term intercompany loans that are denominated in currency that is not the functional currency of the entity that holds the loans. There was an incrementally favorable impact of $13.2 million in Empire mine idle costs driven primarily by an asset retirement obligation adjustment. In addition, there was an incrementally favorable consolidated impact of $13.7 million related to the FERC ruling on the Michigan Electricity Matters that was recorded in the third quarter of 2016 and adjusted in the fourth quarter of 2017.
Other Income (Expense)
The following is a summary of Other income (expense) for the years ended December 31, 2017 and 2016:
|
| | | | | | | | | | | |
| | (In Millions) |
| | 2017 | | 2016 | | Variance Favorable/ (Unfavorable) |
| Interest expense, net | $ | (132.0 | ) | | $ | (200.5 | ) | | $ | 68.5 |
|
| Gain (loss) on extinguishment/restructuring of debt | (165.4 | ) | | 166.3 |
| | (331.7 | ) |
| Other non-operating income | 3.2 |
| | 0.4 |
| | 2.8 |
|
| | $ | (294.2 | ) | | $ | (33.8 | ) | | $ | (260.4 | ) |
The loss on extinguishment/restructuring of debt for the year ended December 31, 2014 and 2013:
|
| | | | | | | | | | | |
| | (In Millions) |
| | 2014 | | 2013 | | Variance
Favorable/
(Unfavorable) |
| Foreign exchange remeasurement | $ | 30.7 |
| | $ | 64.0 |
| | $ | (33.3 | ) |
| Litigation judgment | (96.3 | ) | | — |
| | $ | (96.3 | ) |
| Minimum shipment penalties | (92.6 | ) | | (37.3 | ) | | (55.3 | ) |
| Wabush idle costs | (90.7 | ) | | (7.4 | ) | | (83.3 | ) |
| Other | 22.6 |
| | 27.1 |
| | (4.5 | ) |
| | $ | (226.3 | ) | | $ | 46.4 |
| | $ | (272.7 | ) |
Miscellaneous – net expense2017 of $165.4 million was unfavorable by $272.7 million duringrelated to the year ended December 31, 2014 in comparison to 2013. The year ended December 31, 2014 was impacted negatively by $83.3 million as a resultrepurchase of certain of our first quarter 2014 decisionunsecured senior notes and the redemption in full of certain of our then-outstanding secured notes. This compares to idle and subsequently close the Wabush mine. These costs include idling and closure costs, employment-related expenditures and contract costs. During the year ended December 31, 2014, we incurred costsa gain of $96.3$166.3 million related to an unfavorable litigation judgment in the Worldlink arbitration and $92.6 million for failure to meet minimum monthly shipment requirements. We recorded $36.4 million during the third quarter of 2014 related to minimum shipment penalties associated with the cancellation of the Wabush mine rail contract. The remaining increase in minimum shipment penalties were a result of the continued delay in the Bloom Lake Phase II expansion and idling of the Bloom Lake operations and subsequent transition to "care-and-maintenance" mode. The contract containing the minimum shipment penalties associated with the Bloom Lake mine has been included in the CCAA filing and will be treated as an unsecured claim. Additionally, for the year ended December 31, 2014, there was an unfavorable incremental impact of $33.3 million due2016, primarily related to the change in foreignissuance of our 8.00% 2020 1.5 Lien Notes through an exchange re-measurementoffer on short-term intercompany notes, Australian bank accounts that are denominated in U.S. dollars and certain monetary financial assets and liabilities, which are denominated in something other than the functional currency of the entity.
Other Income (Expense)March 2, 2016.
The following is a summary of other income (expense)Interest expense, net for the yearsyear ended December 31, 2014 and 2013:
|
| | | | | | | | | | | |
| | (In Millions) |
| | 2014 | | 2013 | | Variance Favorable/ (Unfavorable) |
| Interest expense, net | (185.2 | ) | | (179.1 | ) | | (6.1 | ) |
| Other non-operating income (expense) | 26.8 |
| | (2.6 | ) | | 29.4 |
|
| | $ | (158.4 | ) | | $ | (181.7 | ) | | $ | 23.3 |
|
The increase2017, had a favorable variance of $68.5 million versus the prior year, predominantly as a result of the debt restructuring activities that occurred throughout 2017. These debt restructurings resulted in interest expense in 2014 compared to 2013 was attributable primarily to the change in borrowing capacitya reduction of our revolving credit facility which resulted in $3.7 million of unamortizedeffective interest rate to 5.8% and extended our debt issuance costs being expensed as of the effective date of the amendment. maturities.
Refer to NOTE 5 - DEBT AND CREDIT FACILITIES for further information.
Other non-operating income increased by $29.4 million during the year ended December 31, 2014 in comparison to 2013. The increase in other non-operating income was mainly due to our repurchase of debt in the fourth quarter of 2014 that resulted in a $16.2 million gain on extinguishment of debt. Additionally, other non-operating income was impacted positively in the current period by $7.8 million of income related to the sale of our remaining shares in a marketable security as a decision was made to liquidate the asset in 2014.discussion.
Income Taxes
Our tax rate is affected by permanent items, such as depletion and the relative amount of income we earn in various foreign jurisdictions with tax rates that differ from the U.S. statutory rate. It also is affected by discrete items that may occur in any given period, but are not consistent from period to period. The following represents a summary of our tax provision and corresponding effective rates for the years ended December 31, 20142017 and 2013:2016:
| | | | (In Millions) | (In Millions) |
| | 2014 | | 2013 | | Variance | 2017 | | 2016 | | Variance |
| Income tax benefit (expense) | $ | 1,302.0 |
| | $ | (55.1 | ) | | $ | 1,357.1 |
| |
| Income tax benefit | | $ | 252.4 |
| | $ | 12.2 |
| | $ | 240.2 |
|
| Effective tax rate | 13.6 | % | | 11.3 | % | | 2.3 | % | (195.0 | )% | | (5.9 | )% | | (189.1 | )% |
A reconciliation of our income tax attributable to continuing operations computed atcompared to the U.S. federal statutory rate for the years ended December 31, 20142017 and 20132016 is as follows:
|
| | | | | | | | | | | | | |
| (In Millions) |
| | 2014 | | 2013 |
| Tax at U.S. statutory rate of 35 percent | $ | (3,361.3 | ) | | 35.0 | % | | $ | 171.3 |
| | 35.0 | % |
| Increases/(Decreases) due to: | | | | | | | |
| Foreign exchange remeasurement | (4.1 | ) | | — |
| | (2.6 | ) | | (0.5 | ) |
| Non-taxable loss (income) related to noncontrolling interests | 290.1 |
| | (3.0 | ) | | (1.5 | ) | | (0.3 | ) |
| Impact of tax law change | 13.0 |
| | (0.1 | ) | | — |
| | — |
|
| Percentage depletion in excess of cost depletion | (87.9 | ) | | 0.9 |
| | (97.6 | ) | | (19.9 | ) |
| Impact of foreign operations | 592.0 |
| | (6.2 | ) | | (10.2 | ) | | (2.1 | ) |
| Income not subject to tax | (46.5 | ) | | 0.5 |
| | (106.6 | ) | | (21.8 | ) |
| Goodwill impairment | 22.7 |
| | (0.2 | ) | | 20.5 |
| | 4.2 |
|
| State taxes, net | (43.6 | ) | | 0.5 |
| | 5.6 |
| | 1.1 |
|
| Settlement of financial guaranty | (343.3 | ) | | 3.6 |
| | — |
| | — |
|
| Manufacturer's deduction | — |
| | — |
| | (7.9 | ) | | (1.6 | ) |
| Valuation allowance | 1,660.6 |
| | (17.3 | ) | | 73.0 |
| | 14.9 |
|
| Tax uncertainties | 0.2 |
| | — |
| | 19.6 |
| | 5.3 |
|
| Prior year adjustments made in current year | (10.4 | ) | | 0.1 |
| | (11.4 | ) | | (3.6 | ) |
| Other items - net | 16.5 |
| | (0.2 | ) | | 2.9 |
| | 0.6 |
|
| Provision for income tax benefit and effective income tax rate including discrete items | $ | (1,302.0 | ) | | 13.6 | % | | $ | 55.1 |
| | 11.3 | % |
|
| | | | | | | | | | | | | | |
| | | (In Millions) |
| | | 2017 | | 2016 |
| Tax at U.S. statutory rate of 35% | | $ | 45.3 |
| | 35.0 | % | | $ | 72.5 |
| | 35.0 | % |
| Increase (decrease) due to: | | | | | | | | |
| Impact of tax law change - remeasurement of deferred taxes | | 407.5 |
| | 314.8 |
| | 149.1 |
| | 72.0 |
|
| Prior year adjustments in current year | | (1.1 | ) | | (0.8 | ) | | (11.8 | ) | | (5.7 | ) |
| Valuation allowance build (reversal) | | | | | | | | |
| Tax law change - remeasurement of deferred taxes | | (407.5 | ) | | (314.8 | ) | | (149.1 | ) | | (72.0 | ) |
| Current year activity | | (471.7 | ) | | (364.4 | ) | | 93.9 |
| | 45.4 |
|
| Repeal of AMT | | (235.3 | ) | | (181.7 | ) | | — |
| | — |
|
| Prior year adjustments in current year | | (3.0 | ) | | (2.4 | ) | | 6.5 |
| | 3.1 |
|
| Tax uncertainties | | (1.4 | ) | | (1.1 | ) | | (11.3 | ) | | (5.5 | ) |
| Worthless stock deduction | | — |
| | — |
| | (73.4 | ) | | (35.5 | ) |
| Impact of foreign operations | | 475.4 |
| | 367.2 |
| | (42.7 | ) | | (20.6 | ) |
| Percentage depletion in excess of cost depletion | | (61.6 | ) | | (47.6 | ) | | (36.1 | ) | | (17.4 | ) |
| Non-taxable loss (income) related to noncontrolling interests | | 1.3 |
| | 1.0 |
| | (8.8 | ) | | (4.2 | ) |
| State taxes, net | | (0.1 | ) | | — |
| | 0.4 |
| | 0.2 |
|
| Other items, net | | (0.2 | ) | | (0.2 | ) | | (1.4 | ) | | (0.7 | ) |
| Provision for income tax benefit and effective income tax rate including discrete items | | $ | (252.4 | ) | | (195.0 | )% | | $ | (12.2 | ) | | (5.9 | )% |
Our tax provision for the year ended December 31, 20142017 was a benefit of $1,302.0$252.4 million and a 13.6 percentnegative 195.0% effective tax rate compared with an expensea benefit of $55.1$12.2 million and an effective tax rate of 11.3 percentnegative 5.9% for the prior-year.prior year. The changeincrease in the income tax benefit from the prior-year expenseprior year is primarily due primarily to the impairmentrepeal of global long-livedAMT through U.S. income tax reform legislation. The impact of tax law change due to remeasurement of deferred taxes primarily relates to the statutory rate reduction in the U.S. that decreased the deferred tax assets by $334.1 million and the Luxembourg rate reduction that decreased the deferred tax assets by $73.4 million. Both of these asset reductions were fully offset by a decrease in valuation allowances on future tax benefits that management has determined are not recoverable and the settlement of a financial guaranty.allowance. The impact of foreign operations relates to income and losses in foreign jurisdictions where the statutory rates, ranging from 25 percent0% to 30 percent,30%, differ from the U.S. statutory rate of 35 percent. Other items include non-deductible goodwill impairment as well as a decrease in the tax benefit from interest income not subject to tax.
Income not subject to tax includes the tax benefit of the non-taxable interest income that is $46.5 million for the year ended December 31, 2014. Of this, $27.8 million, relates to an intercompany note between the U.S. and Canada. This note was restructured on April 27, 2014 and will no longer result in an income tax benefit after this date. An additional, $18.7 million relates to an intercompany note which was originally between Canada and Australia, but was restructured on December 4, 2014 and is now between Luxembourg and Australia. The balance of the MRPS is $236.0 million at December 31, 2014 with an interest rate of 9.4 percent and a maturity date of December 31, 2020. The balances of the intercompany loans are not permanently invested in the subsidiaries.35%.
See NOTE 9 - INCOME TAXES for further information.
Equity Loss from VenturesDiscontinued Operations, net of tax
EquityDuring the year ended December 31, 2017, the Wabush Scully Mine was sold as part of the ongoing CCAA proceedings for the Wabush Group, which resulted in a net gain of $31.4 million within Loss from Discontinued Operations, net of tax. During the year ended December 31, 2017, we recorded a net loss from venturesdiscontinued operations, net of tax, of $18.7 million, primarily due to recording an estimated liability of $55.6 million related to the probable assertion of a preference claim against the Company which is classified as Contingent claims in the Statements of Consolidated Financial Position, partially offset by the gain discussed above. We recorded a loss from discontinued operations of $19.9 million for the year ended December 31, 20142016.
Refer to NOTE 14 - DISCONTINUED OPERATIONS for further information.
Noncontrolling Interest
During 2017, our ownership interest in Empire increased to 100% as we reached an agreement to distribute the noncontrolling interest net assets of $9.9$132.7 million compares to equity loss from venturesArcelorMittal, in exchange for its interest in Empire. The agreement had no direct impact on the Loss (income) attributable to noncontrolling interest in the Statements of Consolidated Operations. However, for the year ended December 31, 2013 of $74.4 million. The equity loss from ventures for2017, the year ended December 31, 2014 primarily is comprised of the impairment charge of $9.2 million related toEmpire mine was indefinitely idled resulting in a Global Exploration Group investment. The equity loss from ventures for the year ended December 31, 2013 primarily is comprised of the impairment charge of $67.6 million related to our 30 percent ownership interest in Amapá, the sale of which was approved by the Board of Directors in December 2012. The sale closed in the fourth quarter of 2013.
Noncontrolling Interest
Noncontrolling interest primarily is comprised of our consolidated, but less-than-wholly owned subsidiaries at the Bloom Lake and Empire mining operations. The net loss attributable to the noncontrolling interest related to Bloom Lake was $1,113.3 million and $66.5 million forof $3.9 million. In comparison, during the yearsyear ended December 31, 20142016, the Empire mine was operating and 2013, respectively. The net loss in 2014 was driven by other long-lived asset impairment charges recorded in the second halfhad income of 2014 for the Bloom Lake mine of $6.2 billion, of which $1.1 billion was allocated to the noncontrolling interest. This would not have impacted earnings comparably in 2013.
The net income$25.2 million attributable to the noncontrolling interest related to the Empire mining venture was $26.9 million and $20.7 million for the years ended December 31, 2014 and 2013, respectively.interest.
Results of Operations – Consolidated
20132016 Compared to 20122015
The following is a summary of our consolidated results of operations for the years ended December 31, 20132016 and 2012:2015:
| | | | (In Millions) | (In Millions) |
| | 2013 | | 2012 | | Variance Favorable/ (Unfavorable) | 2016 | | 2015 | | Variance Favorable/ (Unfavorable) |
| Revenues from product sales and services | $ | 5,691.4 |
| | $ | 5,872.7 |
| | $ | (181.3 | ) | $ | 2,109.0 |
| | $ | 2,013.3 |
| | $ | 95.7 |
|
| Cost of goods sold and operating expenses | (4,542.1 | ) | | (4,700.6 | ) | | 158.5 |
| (1,719.7 | ) | | (1,776.8 | ) | | 57.1 |
|
| Sales margin | $ | 1,149.3 |
| | $ | 1,172.1 |
| | $ | (22.8 | ) | $ | 389.3 |
| | $ | 236.5 |
| | $ | 152.8 |
|
| Sales margin % | 20.2 | % | | 20.0 | % | | 0.2 | % | 18.5 | % | | 11.7 | % | | 6.8 | % |
Revenues from Product Sales and Services
Sales revenueRevenues from product sales and services for the year ended December 31, 2013 decreased $181.32016 increased $95.7 million, or 3.1 percent,4.8%, from 2012.
2015, which primarily was driven by higher sales volume from our U.S. Iron Ore operations of 932 thousand long tons equating to an increase in revenue of $73.5 million and higher pricing from our Asia Pacific Iron Ore operations for an increase of $69.2 million. The decreaseincrease in sales revenue during 2013 compared to 2012 primarilyvolume mainly was attributable to lower worldwide iron ore sales volumesadditional nominated tons from short-term contracts. Higher pricing and revenue rates were driven by an increase in the Platts 62% Price and a hedging impact in 2015 that was not repeated in 2016, for increased revenue of 1.4 million tons, or $174.7$32.7 million and $29.3 million, respectively. These positive movements were partially offset from lower realized revenue ratespricing from our U.S. Iron Ore operations for coal products of 15.5 percent year-over-year, which resulted in a decrease of $135.1$62.0 million. These decreasesLower pricing primarily was driven by the negative inflation of certain price indices and the impact of net lower overall contracted pricing terms for two short-term customer contracts that were offset partially by higher North American Coal sales volumes of 762 thousand tons, or $91.1 million.based on fixed negotiated rates compared to the prior year, which was based on a different method.
Refer to “Results of Operations – Segment Information” for additional information regarding the specific factors that impacted revenue during the period.
Cost of Goods Sold and Operating Expenses
Cost of goods sold and operating expenses for the years ended December 31, 20132016 and 20122015 were $4,542.1$1,719.7 million and $4,700.6$1,776.8 million, respectively, a decrease of $158.5$57.1 million, or 3.4 percent,3.2%, year-over-year.
Cost of goods sold and operating expenses for the year ended December 31, 20132016 decreased primarily as a result of cost rate decreasesoperational efficiencies and cost-cutting efforts across each of $143.7 millionour business units, which reduced costs by $114.5 million. Additionally, lower idle costs and a favorable foreign exchange rate impact of $70.9 million. Cost rate decreases of $122.1rates decreased costs by $7.8 million at our North American Coal operations were driven primarily dueand $5.5 million, respectively, compared to reduced headcount, cost savings measures and more effective operating efficiency. These cost decreases were offset partially by additional costs of $72.5 million related to supply and product inventory write-downs predominately at our Wabush mine within our Eastern Canadian Iron Ore operations during the year ended December 31, 2013.2015. These decreases in cost were offset partially by higher iron ore sales volumes resulting in higher expense of $56.0 million compared to the year ended December 31, 2015.
Refer to “Results of Operations – Segment Information” for additional information regarding the specific factors that impacted our operating results during the period.
Other Operating Income (Expense)
FollowingThe following is a summary of otherOther operating income (expense) for the years ended December 31, 20132016 and 2012:2015:
|
| | | | | | | | | | | |
| | (In Millions) |
| | 2013 | | 2012 | | Variance Favorable/ (Unfavorable) |
| Selling, general and administrative expenses | $ | (231.6 | ) | | $ | (282.5 | ) | | $ | 50.9 |
|
| Exploration costs | (59.0 | ) | | (142.8 | ) | | 83.8 |
|
| Impairment of goodwill and other long-lived assets | (250.8 | ) | | (1,049.9 | ) | | 799.1 |
|
| Gain (loss) on disposal of assets | 16.7 |
| | 1.2 |
| | 15.5 |
|
| Miscellaneous - net | 46.4 |
| | (6.9 | ) | | 53.3 |
|
| | $ | (478.3 | ) | | $ | (1,480.9 | ) | | $ | 1,002.6 |
|
|
| | | | | | | | | | | |
| | (In Millions) |
| | 2016 | | 2015 | | Variance Favorable/ (Unfavorable) |
| Selling, general and administrative expenses | $ | (117.8 | ) | | $ | (110.0 | ) | | $ | (7.8 | ) |
| Miscellaneous - net | (30.7 | ) | | 24.8 |
| | (55.5 | ) |
| | $ | (148.5 | ) | | $ | (85.2 | ) | | $ | (63.3 | ) |
Selling, general and administrative expenses during the year ended December 31, 2013 decreased $50.92016 increased $7.8 million over 2012.2015. The increase for the year ended December 31, 20132016 compared to the prior year was impacted positivelydriven by reductionsan increase in outsideemployment costs of $8.1 million primarily due to incentive compensation and an increase in expenses of $2.1 million related to a lease abandonment of a corporate office space. These increases were partially offset by a $3.9 million decrease in IT service spending, general travelcosts and employee-related expenseslegal fees.
The following is a summary of Miscellaneous - net for the years ended December 31, 2016 and technology spending2015:
|
| | | | | | | | | | | |
| | (In Millions) |
| | 2016 | | 2015 | | Variance
Favorable/
(Unfavorable) |
| Foreign exchange remeasurement | $ | (16.8 | ) | | $ | 16.3 |
| | $ | (33.1 | ) |
| Michigan Electricity Matters accrual | (12.4 | ) | | — |
| | (12.4 | ) |
| Management and royalty fees | 9.0 |
| | 6.4 |
| | 2.6 |
|
| Empire idle costs | (8.2 | ) | | — |
| | (8.2 | ) |
| Gain (loss) on disposal of assets | (4.8 | ) | | 3.4 |
| | (8.2 | ) |
| Other | 2.5 |
| | (1.3 | ) | | 3.8 |
|
| | $ | (30.7 | ) | | $ | 24.8 |
| | $ | (55.5 | ) |
For the year ended December 31, 2016, there was an incrementally unfavorable impact of $42.7$33.1 million $20.5driven by the change in foreign exchange remeasurement of short-term intercompany loans that are denominated in currency that is not the functional currency of the entity that holds the loans.
Other Income (Expense)
The following is a summary of Other income (expense) for the years ended December 31, 2016 and 2015:
|
| | | | | | | | | | | |
| | (In Millions) |
| | 2016 | | 2015 | | Variance Favorable/ (Unfavorable) |
| Interest expense, net | $ | (200.5 | ) | | $ | (228.5 | ) | | $ | 28.0 |
|
| Gain on extinguishment/restructuring of debt | 166.3 |
| | 392.9 |
| | (226.6 | ) |
| Other non-operating income (expense) | 0.4 |
| | (2.6 | ) | | 3.0 |
|
| | $ | (33.8 | ) | | $ | 161.8 |
| | $ | (195.6 | ) |
The gain on extinguishment/restructuring of debt for the year ended December 31, 2016 was $166.3 million, and $7.1 million, respectively. These decreases were offset partially by $16.4 million in severance costsprimarily related to the voluntary and involuntary terminations as a resultissuance of cost savings actions8.00% 2020 1.5 Lien Notes on March 2, 2016 compared to $392.9 million related to the corporate debt restructuring that occurred during the year ended December 31, 2015.
Interest expense, net for the year ended December 31, 2013 compared to 2012.
Exploration costs decreased2016 was lower by $83.8$20.8 million duringversus the year ended December 31, 2013 from 2012, primarily due to decreases in spend at our Ferroalloys operations and Global Exploration Group operations. Ferroalloys and the Global Exploration Group are reported within our Other reportable segments. Our Global Exploration Group had cost decreases of $48.6 million in 2013 over 2012, due to lower drilling and professional services spend for certain projects. Our Ferroalloys operations had cost decreases of $28.8 million in 2013 over 2012. During 2012, there were increased engineering and drilling costs for external resources utilized to support the Chromite Project feasibility study.
During the fourth quarter of 2013, we continued to experience higher than expected production costs and operational inefficiencies at our Wabush operations within our Eastern Canadian Iron Ore operating segment that resulted in continued declines in our profitability of that business, which represents an asset group for purposes of testing our long-lived assets for recoverability. Driven by the unsustainable high cost structure, which was not economically viable to continue running the operations, we announced on February 11, 2014, we would idle the production of our Wabush Scully mine by the end of the first quarter. The mine was idled by the end March 2014 and in the fourth quarter of 2014 we began to implement the permanent closure plan for the mine. Upon completion of an impairment analysis, it was determined the fair value was less than the carrying value of the asset group, which resulted in an impairment of other long-lived assets of $154.6 million at December 31, 2013.
Additionally during the fourth quarter of 2013, a goodwill impairment charge of $80.9 million was recorded for our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment. Ferroalloys is reported within our Other reportable segments. The goodwill impairment charge was primarily2015 as a result of the decision to indefinitely suspenddebt restructuring activities that occurred during 2016. These debt extinguishments and restructurings resulted in a net reduction of the Chromite Project and to not allocate additional capital for the project given the uncertain timeline and risks associated with the developmentoutstanding principal balance of necessary infrastructure to bring the project online.
During the fourth quarterour senior notes. Additionally, there was a favorable impact of 2012, upon performing our 2012 annual goodwill impairment assessments, a goodwill impairment charge of $997.3$5.8 million was recorded for our CQIM reporting unit within the Eastern Canadian Iron Ore operating segment. The impairment charge for our CQIM reporting unit was driven by the project’s lower than anticipated long-term profitability coupled with delays in achieving full operational capacity and higher capital and operating costs. Additionally, a goodwill impairment charge of $2.7 million was recorded for our Wabush reporting unit. This charge was primarily a result of downward adjustments to our long-term pricing estimates and higher operating costs due to lower production.
Miscellaneous – net was favorable by $53.3 million duringthe reduction of equipment loan interest and capital lease interest for the year ended December 31, 2013 from 2012. The year ended December 31, 2013 was impacted positively as a result of incremental gains of $67.3 million due to foreign exchange re-measurement on short-term intercompany notes, Australian bank accounts that are denominated in U.S. dollars and certain monetary financial assets and liabilities, which are denominated in something other than the functional currency of the entity. Additionally, there was an increase of $31.6 million and $24.3 million, respectively, in net insurance recoveries related to North American Coal mines and various legal settlements period-over-period. These incremental increases were offset partially by the incurred casualty losses in 2013 of $19.1 million related2016 compared to the Pointe Noire oil spill
as well as minimum contractual rail shipment tonnage not being met due to the delay in the Bloom Lake II expansion, which resulted in incurred penalties of $37.3 million.prior year.
Other Income (Expense)
Following is a summary of other income (expense) for the years ended December 31, 2013 and 2012:
|
| | | | | | | | | | | |
| | (In Millions) |
| | 2013 | | 2012 | | Variance Favorable/ (Unfavorable) |
| Interest expense, net | (179.1 | ) | | (195.6 | ) | | 16.5 |
|
| Other non-operating income (expense) | (2.6 | ) | | 2.6 |
| | (5.2 | ) |
| | $ | (181.7 | ) | | $ | (193.0 | ) | | $ | 11.3 |
|
The decrease in interest expense in 2013 compared to 2012 was attributable primarily due to reduced interest expense of $35.7 million related to the repurchase of the $325.0 million private placement senior notes. This decrease was offset partially by additional interest expense of $20.3 million related to the $500 million 3.95 percent senior notes issued in December 2012. Refer to NOTE 5 - DEBT AND CREDIT FACILITIES for further information.discussion.
Income Taxes
Our tax rate is affected by permanent items, such as depletion and the relative amount of income we earn in various foreign jurisdictions with tax rates that differ from the U.S. statutory rate. It also is affected by discrete items that may occur in any given period, but are not consistent from period to period. The following represents a summary of our tax provision and corresponding effective rates for the years ended December 31, 20132016 and 2012:2015:
| | | | (In Millions) | (In Millions) |
| | 2013 | | 2012 | | Variance | 2016 | | 2015 | | Variance |
| Income tax expense | $ | (55.1 | ) | | $ | (255.9 | ) | | $ | 200.8 |
| |
| Income tax benefit (expense) | | $ | 12.2 |
| | $ | (169.3 | ) | | $ | 181.5 |
|
| Effective tax rate | 11.3 | % | | (51.0 | )% | | 62.3 | % | (5.9 | )% | | 54.1 | % | | (60.0 | )% |
A reconciliation of our income tax attributable to continuing operations computed at the U.S. federal statutory rate for the years ended December 31, 20132016 and 20122015 is as follows:
|
| | | | | | | | | | | | | |
| | (In Millions) |
| | 2013 | | 2012 |
| Tax at U.S. statutory rate of 35 percent | $ | 171.3 |
| | 35.0 | % | | $ | (175.6 | ) | | 35.0 | % |
| Increases/(Decreases) due to: | | | | | | | |
| Foreign exchange remeasurement | (2.6 | ) | | (0.5 | ) | | 62.3 |
| | (12.4 | ) |
| Non-taxable loss (income) related to noncontrolling interests | (1.5 | ) | | (0.3 | ) | | 61.0 |
| | (12.0 | ) |
| Impact of tax law change | — |
| | — |
| | (357.1 | ) | | 71.2 |
|
| Percentage depletion in excess of cost depletion | (97.6 | ) | | (19.9 | ) | | (109.1 | ) | | 21.7 |
|
| Impact of foreign operations | (10.2 | ) | | (2.1 | ) | | 65.2 |
| | (13.0 | ) |
| Income not subject to tax | (106.6 | ) | | (21.8 | ) | | (108.0 | ) | | 21.5 |
|
| Goodwill impairment | 20.5 |
| | 4.2 |
| | 202.2 |
| | (40.3 | ) |
| State taxes, net | 5.6 |
| | 1.1 |
| | 7.3 |
| | (1.5 | ) |
| Manufacturer's deduction | (7.9 | ) | | (1.6 | ) | | (4.7 | ) | | 0.9 |
|
| Valuation allowance | 73.0 |
| | 14.9 |
| | 634.5 |
| | (126.5 | ) |
| Tax uncertainties | 19.6 |
| | 5.3 |
| | (14.8 | ) | | 2.9 |
|
| Prior year adjustments made in current year | (11.4 | ) | | (3.6 | ) | | (5.7 | ) | | 1.1 |
|
| Other items - net | 2.9 |
| | 0.6 |
| | (1.6 | ) | | 0.4 |
|
| Income tax expense | $ | 55.1 |
| | 11.3 | % | | $ | 255.9 |
| | (51.0 | )% |
|
| | | | | | | | | | | | | |
| | (In Millions) |
| | 2016 | | 2015 |
| Tax at U.S. statutory rate of 35% | $ | 72.5 |
| | 35.0 | % | | $ | 109.6 |
| | 35.0 | % |
| Increase (decrease) due to: | | | | | | | |
| Impact of tax law change - remeasurement of deferred taxes | 149.1 |
| | 72.0 |
| | — |
| | — |
|
| Prior year adjustments in current year | (11.8 | ) | | (5.7 | ) | | 5.9 |
| | 1.9 |
|
| Valuation allowance build (reversal) | | | | | | | |
| Tax law change - remeasurement of deferred taxes | (149.1 | ) | | (72.0 | ) | | — |
| | — |
|
| Current year activity | 93.9 |
| | 45.4 |
| | (104.6 | ) | | (33.4 | ) |
| Repeal of AMT | — |
| | — |
| | — |
| | — |
|
| Prior year adjustments in current year | 6.5 |
| | 3.1 |
| | 165.8 |
| | 52.9 |
|
| Tax uncertainties | (11.3 | ) | | (5.5 | ) | | 84.1 |
| | 26.9 |
|
| Worthless stock deduction | (73.4 | ) | | (35.5 | ) | | — |
| | — |
|
| Impact of foreign operations | (42.7 | ) | | (20.6 | ) | | (53.9 | ) | | (17.2 | ) |
| Percentage depletion in excess of cost depletion | (36.1 | ) | | (17.4 | ) | | (34.9 | ) | | (11.1 | ) |
| Non-taxable income related to noncontrolling interests | (8.8 | ) | | (4.2 | ) | | (3.0 | ) | | (1.0 | ) |
| State taxes, net | 0.4 |
| | 0.2 |
| | 0.2 |
| | 0.1 |
|
| Other items, net | (1.4 | ) | | (0.7 | ) | | 0.1 |
| | — |
|
| Provision for income tax (benefit) expense and effective income tax rate including discrete items | $ | (12.2 | ) | | (5.9 | )% | | $ | 169.3 |
| | 54.1 | % |
In 2013, ourOur tax provision for the year ended December 31, 2016 was a benefit of $12.2 million and a negative 5.9% effective tax rate compared with an expense of $169.3 million and an effective tax rate of 54.1% for the prior year. The change to an income tax benefit from the prior year expense is due to the prior year recording of valuation allowances against existing deferred tax assets, a worthless stock deduction in the current year and the settlement of unrecognized tax benefits. The impact of tax law change relates to the enacted statutory rate reduction in Luxembourg that decreased the deferred tax assets by $200.8$149.1 million compared to 2012. Theand was fully offset by a decrease in valuation allowance. The impact of foreign operations relates to income tax expense year over year related primarilyin foreign jurisdictions where the statutory rates, ranging from 0% to various items recorded in 2012 including30%, differ from the placementU.S statutory rate of a full valuation allowance on the asset related to the Alternative Minimum Tax credit, the effect of currency elections on remeasurement, and the goodwill impairment related to Bloom Lake. Additionally, we recorded approximately $11.4 million of tax benefit in 2013 related primarily to adjustments to prior-year current and deferred tax balances.35%.
See NOTE 9 - INCOME TAXES for further information.
Equity Loss from Ventures
Equity loss from ventures for the year ended December 31, 2013 of $74.4 million compares to equity loss from ventures for the year ended December 31, 2012 of $404.8 million. The equity loss from ventures for the year ended December 31, 2013 primarily was comprised of the impairment charge of $67.6 million related to our 30 percent ownership interest in Amapá, the sale of which was approved by the Board of Directors in December 2012. The sale closed in the fourth quarter of 2013. The equity loss from ventures for 2012 was comprised primarily of an impairment charge of $365.4 million related to the sale of our ownership interest in Amapá. Additionally, our equity loss consisted of our share of operating losses of $4.9 million for the year ended December 31, 2013, compared with operating losses of $31.4 million for 2012. Amapá’s equity loss from operations in 2012 was attributable primarily to our share of a settlement charge taken in the third quarter of 2012 for the termination of a transportation agreement that resulted in a $10.2 million loss and a $5.5 million adjustment related to tax credits that we determined would not be realizable.
Income and Gain on SaleLoss from Discontinued Operations, net of tax
Income and Gain on SaleLoss from Discontinued Operations, net of tax was comprised primarily of the gain on the sale of Sonoma and the loss on thediscontinued operations of the 45 percent economic interest in the Sonoma joint venture coal mine forrelated to our North American Coal operating segment and our Eastern Canadian Iron Ore operations. During the year ended December 31, 2012. The sale2016, we recorded a loss from discontinued operations of Sonoma resulted in$19.9 million, net of tax, attributable to a net gainloss from a change in estimate to our Loans to and accounts receivable from the Canadian Entities of $38.0$17.5 million that was recorded uponin the completionStatements of the sale on November 12, 2012. The Sonoma joint venture operations resulted inConsolidated Financial Position and a net loss of $2.1$2.4 million from certain disputes related to the sale of our North American Coal segment.
As of March 31, 2015, management determined that our North American Coal operating segment met the criteria to be classified as held for the year ended December 31, 2012. Incomesale under ASC 205, Presentation of Financial Statements. As such, all 2016 and historical North American Coal operating segment results are included in our financial statements and classified within discontinued operations. The Loss from discontinued operations,Discontinued Operations, net of tax in 2013 related to additional income tax benefit resulting from the actual tax gain from the sale of Sonoma included on the 2012 tax return, whichNorth American Coal operating segment was filed during the three months ended September 30, 2013.
Noncontrolling Interest
Noncontrolling interest primarily was comprised of our consolidated, but less-than-wholly owned subsidiaries at the Bloom Lake and Empire mining operations. The net loss attributable to the noncontrolling interest related to Bloom Lake was $66.5$2.4 million and $252.0$152.4 million for the years ended December 31, 20132016 and 2012,2015, respectively.
In January 2015, we announced that the Bloom Lake Group commenced restructuring proceedings in Montreal, Quebec under the CCAA. At that time, we had suspended Bloom Lake operations and for several months had been exploring options to sell certain of our Canadian assets, among other initiatives. Effective January 27, 2015, following the commencement of CCAA proceedings for the Bloom Lake Group, we deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries comprising substantially all of our Canadian operations. Additionally, on May 20, 2015, the Wabush Group commenced restructuring proceedings in Montreal, Quebec under the CCAA which resulted in the deconsolidation of the remaining Wabush Group entities that were not previously deconsolidated. The net loss in 2012Wabush Group was driven by an impairmentno longer generating revenues and was not able to meet its obligations as they came due. As a result of goodwill of $997.3 million, of which $249.3 million was allocatedthis action, the CCAA protection granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate the reorganization of each of their businesses and operations. Financial results prior to the respective deconsolidations of the Bloom Lake and Wabush Groups and subsequent expenses directly associated with the Canadian Entities are included in our financial statements and classified within discontinued operations. The Loss from Discontinued Operations, net of tax related to the deconsolidated Canadian Entities was $17.5 million and $739.7 million for the years ended December 31, 2016 and 2015, respectively.
Refer to NOTE 14 - DISCONTINUED OPERATIONS for further information.
Noncontrolling Interest
Noncontrolling interest was comprised primarily of the 21% noncontrolling interest.
interest in the consolidated, but less-than-wholly owned subsidiary at our Empire mining venture based on our ownership as of December 31, 2016 and 2015, and through the CCAA filing on January 27, 2015, the 17.2% noncontrolling interest in the Bloom Lake operations. The net income attributable to the noncontrolling interest related to the Empire mining venture was $20.7$25.2 million and $25.9$8.6 million for the years ended December 31, 20132016 and 2012, respectively2015, respectively. The net loss attributable to the noncontrolling interest related to Bloom Lake was $7.7 million for the year ended December 31, 2015. There was no gain or loss attributable to the noncontrolling interest related to Bloom Lake for the year ended December 31, 2016.
Results of Operations – Segment Information
Our Company's primary operations are organized and managed according to product category and geographic location. Segment information reflects our strategic business units, which are organized to meet customer requirements and global competition. We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold and operating expenses identifiable to each segment. This measure of operatingAdditionally, we evaluate performance is an effective measurementon a segment basis, as we focus on reducing production costs.
We have historically evaluated segment performance based on sales margin, definedwell as revenues less cost of goods sold, and operating expenses identifiable to each segment. Additionally, beginning in the third quarter of 2014, concurrent with the change of a majority of our Board of Directors in August, 2014, which constituted and triggered a "change in control" as defined in our equity plans, management began to evaluate segment performanceconsolidated basis, based on EBITDA definedand Adjusted EBITDA. These measures allow management and investors to focus on our ability to service our debt as Net Income (Loss) before interest, income taxes, depreciation, depletionwell as illustrate how the business and amortization,each operating segment are performing. Additionally, EBITDA and Adjusted EBITDA definedassist management and investors in their analysis and forecasting as EBITDA excluding certain items such as impairment charges, impacts of permanently idled, closed or sold facilities, foreign currency remeasurement, severance and other costs associated with the change in control, litigation judgments and intersegment corporate allocations of SG&A costs. Management uses and believes that investors benefit from referring to these measures in evaluating operating and financial results, as well as in planning, forecasting and analyzing future periods as these financial measures approximate the cash flows associated with the operational earnings.
20142017 Compared to 20132016
| | | | (In Millions) | (In Millions) |
| | 2014 | | 2013 | 2017 | | 2016 |
| | | | | | | |
| Net Income (Loss) | $ | (8,311.6 | ) | | $ | 361.8 |
| |
| Net Income | | $ | 363.1 |
| | $ | 199.3 |
|
| Less: | | | | | | |
| Interest expense, net | (185.2 | ) | | (179.1 | ) | (132.0 | ) | | (200.5 | ) |
| Income tax benefit (expense) | 1,302.0 |
| | (55.1 | ) | |
| Income tax benefit | | 252.4 |
| | 12.2 |
|
| Depreciation, depletion and amortization | (504.0 | ) | | (593.3 | ) | (87.7 | ) | | (115.4 | ) |
| EBITDA | $ | (8,924.4 | ) | | $ | 1,189.3 |
| |
| Total EBITDA | | $ | 330.4 |
| | $ | 503.0 |
|
| Less: | | | | | | |
| Impairment of goodwill and other long-lived assets | $ | (9,029.9 | ) | | $ | (250.8 | ) | |
| Loss on sale of Cliffs Logan County Coal | (419.6 | ) | | — |
| |
| Wabush mine impact | (158.7 | ) | | (72.7 | ) | |
| Bloom Lake mine impact | (137.9 | ) | | 46.5 |
| |
| Gain (loss) on extinguishment of debt | | $ | (165.4 | ) | | $ | 166.3 |
|
| Impact of discontinued operations | | (18.7 | ) | | (19.9 | ) |
| Foreign exchange remeasurement | 30.7 |
| | 64.0 |
| 11.4 |
| | (16.8 | ) |
| Proxy contest and change in control costs in SG&A | (26.6 | ) | | — |
| |
| Litigation judgment | (96.3 | ) | | (9.6 | ) | |
| Severance in SG&A | (15.8 | ) | | (16.4 | ) | |
| Severance and contractor termination costs | | — |
| | (0.1 | ) |
| Supplies inventory adjustment | | (1.8 | ) | | — |
|
| Total Adjusted EBITDA | $ | 929.7 |
| | $ | 1,428.3 |
| $ | 504.9 |
| | $ | 373.5 |
|
| | | | | | | |
| EBITDA: | | | | | | |
| U.S. Iron Ore | $ | 805.6 |
| | $ | 1,000.1 |
| $ | 534.9 |
| | $ | 342.4 |
|
| Asia Pacific Iron Ore | (369.8 | ) | | 500.4 |
| 40.7 |
| | 128.3 |
|
| North American Coal | (1,326.8 | ) | | 129.5 |
| |
| Eastern Canadian Iron Ore | (7,673.9 | ) | | (192.8 | ) | |
| Other | (359.5 | ) | | (247.9 | ) | |
| Other (including discontinued operations) | | (245.2 | ) | | 32.3 |
|
| Total EBITDA | $ | (8,924.4 | ) | | $ | 1,189.3 |
| $ | 330.4 |
| | $ | 503.0 |
|
| | | | | | | |
| Adjusted EBITDA: | | | | | | |
| U.S. Iron Ore | $ | 831.2 |
| | $ | 1,030.8 |
| $ | 559.4 |
| | $ | 359.6 |
|
| Asia Pacific Iron Ore | 264.6 |
| | 525.7 |
| 50.4 |
| | 132.9 |
|
| North American Coal | (28.5 | ) | | 154.0 |
| |
| Eastern Canadian Iron Ore | — |
| | — |
| |
| Other | (137.6 | ) | | (282.2 | ) | (104.9 | ) | | (119.0 | ) |
| Total Adjusted EBITDA | $ | 929.7 |
| | $ | 1,428.3 |
| $ | 504.9 |
| | $ | 373.5 |
|
EBITDA for the year endedDecember 31, 20142017 decreased by $10,113.7$172.6 million on a consolidated basis from 2013.2016. The decreaseunfavorable variance in EBITDA for the year ended December 31, 2017 was driven primarily driven by the goodwill and long-lived asset impairment charges recorded during 2014an incrementally negative impact of $7,269.2 million, $624.2 million, $857.5 million and $279.0$331.7 million related to debt extinguishment/restructuring activities compared to the Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal and Other segments, respectively. Additionally, lowerprior year, partially offset by an increase in sales margins across all operating segments negatively impacted EBITDA and wasmargin of $112.4 million compared to the main driver in the change of prior year.
Adjusted EBITDA which decreasedincreased by $498.6$131.4 million for the year endedDecember 31, 20142017 from the comparable period in 2013. See2016. The increase primarily was attributable to higher consolidated sales margin of $112.4 million for the year ended December 31, 2017, compared to the prior year. Refer to further detail below for additional information regarding the specific factors that impacted each reportable segments'segment's sales margin during 2014.the 2017 and 2016.
U.S. Iron Ore
The following is a summary of U.S. Iron Ore results for the years ended December 31, 20142017 and 2013:2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | | | Changes due to: | |
|
| | | Year Ended
December 31, | | Revenue and cost rate | | Sales volume | | Idle cost/production volume variance | | Freight and reimburse-ment | | Total change |
| | | 2014 | | 2013 | | | | | |
| Revenues from product sales and services | | $ | 2,506.5 |
| | $ | 2,667.9 |
| | $ | (233.6 | ) | | $ | 60.8 |
| | $ | — |
| | $ | 11.4 |
| | $ | (161.4 | ) |
| Cost of goods sold and operating expenses | | (1,796.1 | ) | | (1,766.0 | ) | | (34.4 | ) | | (33.2 | ) | | 48.9 |
| | (11.4 | ) | | (30.1 | ) |
| Sales margin | | $ | 710.4 |
| | $ | 901.9 |
| | $ | (268.0 | ) | | $ | 27.6 |
| | $ | 48.9 |
| | $ | — |
| | $ | (191.5 | ) |
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | | | | | | |
| | |
| Per Ton Information | | 2014 | | 2013 | | Difference | | Percent change | | | | | | |
Realized product revenue rate1 | | $ | 102.36 |
| | $ | 113.08 |
| | $ | (10.72 | ) | | (9.5 | )% | | | | | | |
| Cash production cost | | 64.09 |
| | 64.65 |
| | (0.56 | ) | | (0.9 | )% | | | | | | |
| Non-production cash cost | | 0.82 |
| | 0.43 |
| | 0.39 |
| | 90.7 | % | | | | | | |
Cost of goods sold and operating expense rate1 (excluding DDA) | | 64.91 |
| | 65.08 |
| | (0.17 | ) | | (0.3 | )% | | | | | | |
| Depreciation, depletion & amortization | | 4.92 |
| | 5.65 |
| | (0.73 | ) | | (12.9 | )% | | | | | | |
| Total cost of goods sold and operating expense rate | | 69.83 |
| | 70.73 |
| | (0.90 | ) | | (1.3 | )% | | | | | | |
| Sales margin | | $ | 32.53 |
| | $ | 42.35 |
| | $ | (9.82 | ) | | (23.2 | )% | | | | | | |
| | | | | | | | | | | | | | | |
Sales tons2 (In thousands) | | 21,840 |
| | 21,299 |
| | | | | | | | | | |
Production tons2 (In thousands) | | | | | | | | | | | | | | |
| Total | | 29,733 |
| | 27,234 |
| | | | | | | | | | |
| Cliffs’ share of total | | 22,431 |
| | 20,271 |
| | | | | | | | | | |
1 Excludes revenues and expenses related to domestic freight, which are offsetting and have no impact on sales margin. Revenues also exclude venture partner cost reimbursements. |
2 Tons are long tons (2,240 pounds). |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | | | Changes due to: | |
|
| | | Year Ended
December 31, | | Revenue and cost rate | | Sales volume | | Idle cost/production volume variance | | Freight and reimburse-ment | | Total change |
| | | 2017 | | 2016 | | | | | |
| Revenues from product sales and services | | $ | 1,866.0 |
| | $ | 1,554.5 |
| | $ | 228.2 |
| | $ | 36.7 |
| | $ | — |
| | $ | 46.6 |
| | $ | 311.5 |
|
| Cost of goods sold and operating expenses | | (1,400.6 | ) | | (1,278.8 | ) | | (111.5 | ) | | (18.4 | ) | | 54.7 |
| | (46.6 | ) | | (121.8 | ) |
| Sales margin | | $ | 465.4 |
| | $ | 275.7 |
| | $ | 116.7 |
| | $ | 18.3 |
| | $ | 54.7 |
| | $ | — |
| | $ | 189.7 |
|
|
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | | | |
| Per Long Sales Ton Information | | 2017 | | 2016 | | Difference | | Percent change |
Realized product revenue rate1 | | $ | 88.03 |
| | $ | 75.71 |
| | $ | 12.32 |
| | 16.3 | % |
Cash cost of goods sold and operating expense rate1,2 | | 59.55 |
| | 55.97 |
| | 3.58 |
| | 6.4 | % |
| Depreciation, depletion & amortization | | 3.56 |
| | 4.61 |
| | (1.05 | ) | | (22.8 | )% |
| Total cost of goods sold and operating expense rate | | 63.11 |
| | 60.58 |
| | 2.53 |
| | 4.2 | % |
| Sales margin | | $ | 24.92 |
| | $ | 15.13 |
| | $ | 9.79 |
| | 64.7 | % |
| | | | | | | | | |
Sales tons3 (In thousands) | | 18,683 |
| | 18,224 |
| | | | |
Production tons3 (In thousands) | | | | | | | | |
| Total | | 25,542 |
| | 23,416 |
| | | | |
| Cliffs’ share of total | | 18,776 |
| | 15,982 |
| | | | |
| | | | | | | | | |
1 Excludes revenues and expenses related to domestic freight, which are offsetting and have no impact on sales margin. Revenues and expenses also exclude venture partner cost reimbursements. |
2 Cash cost of goods sold and operating expense rate is a non-GAAP financial measure. Refer to "Non-GAAP Reconciliation" for reconciliation in dollars back to our consolidated financial statements. |
3 Tons are long tons. |
Sales margin for U.S. Iron Ore was $710.4$465.4 million for the year ended December 31, 2014,2017, compared with the sales margin of $901.9$275.7 million for the year ended December 31, 2013. The decline compared to the prior year is attributable to a decrease in revenue of $161.4 million as well as an increase in cost of goods sold and operating expenses of $30.1 million.2016. Sales margin per long ton decreased 23.2 percentincreased 64.7% to $32.53$24.92 per long ton during the year ended December 31, 20142017 compared to 2013.2016.
Revenue decreasedincreased by $172.8$264.9 million during the year ended December 31, 2017, compared to 2016, excluding the increase of $11.4 million of freight and reimbursements from the prior year,increase of $46.6 million, predominantly due to:
TheAn increase in the average year-to-date realized product revenue rate declined by $10.72of $12.32 per long ton or 9.5 percent16.3% during the year ended December 31, 2017, compared to $102.36 per ton in 2014,2016, which resulted in a decreasean increase of $233.6$228.2 million. This decline is a result of:predominantly due to:
| |
| ◦ | ChangesAn increase in customer pricing negativelyPlatts 62% Price, which positively affected the realized revenue rate by $6$9 per long ton driven primarily byor $176 million; |
| |
| ◦ | An increase in the period-over-period reduction in Platts 62 percent Fe fines spotaverage annual daily market price and customer pricing for hot-rolled coil steel, which positively affected the realized revenue rate by new base pricing from an additional contract;$5 per long ton or $100 million; and |
| |
| ◦ | RealizedHigher pellet premiums, which positively affected the realized revenue rates impacted negativelyrate by $5 per long ton related to one major customer contract with a reduced average selling price due to a contractual change in the 2014 pricing mechanism.or $94 million. |
| |
| ◦ | These increases were offset partially by changes in customer and contract mix and carryover pricing impacts, which negatively affected the realized revenue rate by $5 per long ton or $84 million; and |
•Primarily offset by higher sales volumes of 541 thousand tons or $60.8 million due to:
| |
| ◦ | Higher Great Lakes sales due to increased contracted tonsindex freight rates, a component in 2014 from two customers due to separatesome of our contract extensions/amendments, higherpricing formulas, which negatively affected the realized revenue rate by $3 per long ton or $63 million. |
Higher sales volumes of 0.5 million long tons during the year ended December 31, 2017, which resulted in increased revenues of $36.7 million due to:
| |
| ◦ | Increased demand from a customer, providing additional sales volume of 1.8 million long tons, compared to the prior year when the customer had sufficient inventory due to the Great Lakes freeze preventing the customer from reachingidle of one of its self-produced ore along with increased nominations in 2014 for two major customer contracts.facilities and additional suppliers; |
| |
| ◦ | PartiallyIncreased demand from a customer, providing additional sales volume of 1.3 million long tons, resulting from the fourth quarter 2015 termination of its contract causing a nine-month gap in sales to that customer; and |
| |
| ◦ | An increase in exports to Asia in order to offset a fourth quarter reduction in domestic nomination from a major customer and fewer domestic spot contracts, providing additional sales volume of 0.9 million long tons compared to 2016. |
| |
| ◦ | These increases were offset partially by decreased export2.8 million long tons that were sold in 2016 on separate spot contracts with two customers and were not renewed; and |
| |
| ◦ | Decreased sales to a customer due to increased 2014 Great Lakes nominationstiming of payments and low market pricing providing a disincentive for spot shipment opportunities along with reduced spotlower 2017 nomination, resulting in a decrease in sales that occurred with one customer in the prior-year not recurring for as much tonnage in 2014.volume of 0.8 million long tons. |
Cost of goods sold and operating expenses in 2014 increased $18.7$75.2 million during the year ended December 31, 2017, compared to 2016, excluding the increase of $11.4 million of freight and reimbursements from the prior year,increase of $46.6 million, predominantly as a result of:
Higher costs related to increased mobile equipmentspending on repairs and increased maintenance of $44 million or $2 per long ton, higher profit sharing and repairbenefit costs primarily driven by increased kiln repairs at Empire in 2014 due to the 2016 life-of-mine extension, mill repair at the Hibbing mine, along withof $35 million or $2 per long ton, and higher costs related to increased energy rates in the first quarterfor natural gas, diesel and electricity of 2014;$23 million or $1 per long ton; and
Increased sales volumes as discussed above thatwhich resulted in increased costs of $18 million period-over-period.
These increases were offset partially by $33.2 million compared to the prior-year period.
Partially offset by lowerdecreased idle costs of $48.9$55 million or $3 per long ton due to restarting the two production lines at ouridle of the United Taconite and Northshore minemines during the first quarter of 2014 that were previously idled in January 2013 and the non-recurrence of the 2013 summer shutdown of the Empire mine in 2014.
prior year.Production
Cliffs'Our share of production in itsour U.S. Iron Ore segment increased by 10.7 percent in 201417.5% during the year ended December 31, 2017 when compared to 2013. There2016. The increase in production volume primarily is attributable to all active mining facilities fully operating in 2017 compared to the various idled operations during 2016. United Taconite was increasedfully operating during the year ended December 31, 2017, adding an incremental 3.3 million long tons of production, at our Empire mine of 1.3 million tons in 2014compared to the previous year's production levels as a result of being idled until it was restarted again in August 2016. Secondly, Northshore added incremental tonnage of 2.1 million long tons during the non-recurrenceyear ended December 31, 2017, when it was substantially at full production, compared to its previous year's production tonnage when it was fully idled for the first four months of 2016. These production gains were offset partially by the indefinite idle of the summer shutdown that occurred in 2013, beginning early in the second quarter and ending in the third quarter. Additionally, there was an increase in production of 1.4 million tons at the Northshore mine during 2014, as we restarted the two idled furnaces in the first quarter of 2014. We had previously idled two of the four furnaces at the NorthshoreEmpire mine in January 2013. These increases were partially offsetAugust 2016, lowering production by decreased production of 260 thousand2.8 million long tons, at our United Taconitecompared to the prior year when the mine due to extreme weather and unplanned maintenance outages. One of the four furnaces in the Northshore pellet plant became idled in January 2015 and is expected to remain idled throughout the year.was operating.
Asia Pacific Iron Ore
The following is a summary of Asia Pacific Iron Ore results for the years ended December 31, 20142017 and 2013:2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | | | Change due to: | | |
| | | Year Ended
December 31, | | Revenue and cost rate | | Sales volume | | Exchange rate | | Freight and reimburse-ment | | Total change |
| | | 2014 | | 2013 | | | | | |
| Revenues from product sales and services | | $ | 866.7 |
| | $ | 1,224.3 |
| | $ | (414.8 | ) | | $ | 54.8 |
| | $ | (4.5 | ) | | $ | 6.9 |
| | $ | (357.6 | ) |
| Cost of goods sold and operating expenses | | (745.0 | ) | | (857.2 | ) | | 102.7 |
| | (37.9 | ) | | 54.3 |
| | (6.9 | ) | | 112.2 |
|
| Sales margin | | $ | 121.7 |
| | $ | 367.1 |
| | $ | (312.1 | ) | | $ | 16.9 |
| | $ | 49.8 |
| | $ | — |
| | $ | (245.4 | ) |
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | | | | | | | | |
|
| Per Ton Information | | 2014 | | 2013 | | Difference | | Percent change | | | | | | |
Realized product revenue rate1 | | $ | 74.56 |
| | $ | 110.87 |
| | $ | (36.31 | ) | | (32.8 | )% | | | | | | |
| Cash production cost | | 49.41 |
| | 58.02 |
| | (8.61 | ) | | (14.8 | )% | | | | | | |
| Non-production cash cost | | 1.95 |
| | 5.69 |
| | (3.74 | ) | | (65.7 | )% | | | | | | |
Cost of goods sold and operating expense rate1 (excluding DDA) | | 51.36 |
| | 63.71 |
| | (12.35 | ) | | (19.4 | )% | | | | | | |
| Depreciation, depletion & amortization | | 12.65 |
| | 13.92 |
| | (1.27 | ) | | (9.1 | )% | | | | | | |
| Total cost of goods sold and operating expense rate | | 64.01 |
| | 77.63 |
| | (13.62 | ) | | (17.5 | )% | | | | | | |
| Sales margin | | $ | 10.55 |
| | $ | 33.24 |
| | $ | (22.69 | ) | | (68.3 | )% | | | | | | |
| | | | | | | | | | | | | | | |
Sales tons2 (In thousands) | | 11,531 |
| | 11,043 |
| | | | | | | | | | |
Production tons2 (In thousands) | | 11,352 |
| | 11,109 |
| | | | | | | | | | |
1 We began selling a portion of our product on a CFR basis in 2014. As such, the information above excludes revenues and expenses related to freight, which are offsetting and have no impact on sales margin. |
2 Metric tons (2,205 pounds). |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | | | Change due to: | | |
| | | Year Ended
December 31, | | Revenue and cost rate | | Sales volume | | Exchange rate | | Freight and reimburse-ment | | Total change |
| | | 2017 | | 2016 | | | | | |
| Revenues from product sales and services | | $ | 464.2 |
| | $ | 554.5 |
| | $ | (4.9 | ) | | $ | (81.0 | ) | | $ | (3.3 | ) | | $ | (1.1 | ) | | $ | (90.3 | ) |
| Cost of goods sold and operating expenses | | (427.9 | ) | | (440.9 | ) | | (45.5 | ) | | 69.3 |
| | (11.9 | ) | | 1.1 |
| | 13.0 |
|
| Sales margin | | $ | 36.3 |
| | $ | 113.6 |
| | $ | (50.4 | ) | | $ | (11.7 | ) | | $ | (15.2 | ) | | $ | — |
| | $ | (77.3 | ) |
|
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | | | |
| Per Metric Sales Ton Information | | 2017 | | 2016 | | Difference | | Percent change |
Realized product revenue rate1 | | $ | 45.31 |
| | $ | 45.85 |
| | $ | (0.54 | ) | | (1.2 | )% |
Cash cost of goods sold and operating expense rate1,2 | | 40.15 |
| | 33.94 |
| | 6.21 |
| | 18.3 | % |
| Depreciation, depletion & amortization | | 1.46 |
| | 2.16 |
| | (0.70 | ) | | (32.4 | )% |
| Total cost of goods sold and operating expense rate | | 41.61 |
| | 36.10 |
| | 5.51 |
| | 15.3 | % |
| Sales margin | | $ | 3.70 |
| | $ | 9.75 |
| | $ | (6.05 | ) | | (62.1 | )% |
| | | | | | | | | |
Sales tons3 (In thousands) | | 9,812 |
| | 11,642 |
| | | | |
Production tons3 (In thousands) | | 10,113 |
| | 11,839 |
| | | | |
| | | | | | | | | |
1 The information above excludes revenues and expenses related to freight, which are offsetting and have no impact on sales margin. |
2 Cash cost of goods sold and operating expense rate is a non-GAAP financial measure. Refer to "Non-GAAP Reconciliation" for reconciliation in dollars back to our consolidated financial statements. |
3 Tons are metric tons. |
Sales margin for our Asia Pacific Iron Ore segment decreased to $121.7$36.3 million during the year ended December 31, 20142017, compared with $367.1$113.6 million for the same period in 2013.2016. Sales margin per metric ton decreased 68.3 percent62.1% to $10.55$3.70 per metric ton in 20142017, compared to 2013.2016.
Revenue decreased by $364.5 million during the year ended December 31, 2014 over the prior year, excluding the increase of $6.9 million of freight and reimbursements, primarily as a result of:
An overall decrease to the average realized revenue rate, which resulted in a decrease of $414.8 million, primarily as a result of a decrease in the Platts 62 percent Fe fines spot price to an average of $97 per ton from $135 per ton in the prior-year period,
Partially offset by the higher sales volume of 11.5 million tons during the year ended December 31, 2014 compared with 11.0 million tons during the prior-year period due to strong rail deliveries and increased production, resulting in an increase in revenue of $54.8 million.
Cost of goods sold and operating expenses in the year ended December 31, 2014 decreased $119.1 million, excluding the increase of $6.9 million of freight and reimbursements, compared to 2013 primarily as a result of:
Reduced mining costs of $81.2 million mainly due to lower mining contractor costs primarily resulting from a focus on efficiencies across the operation, lower sales royalties of $23.9 million primarily attributable to the decline in the Platts 62 percent Fe fines spot price, and lower logistics costs of $12.0 million primarily attributable to the finalization of the port dispute. These cost savings are partially offset
by an increase in site administration expenses of $9.6 million due to realignment of head count to the sites and severance payments of $1.6 million; and
Favorable foreign exchange rate variances of $54.3 million or $5 per metric ton.
These decreases were offset partially by higher sales volumes, as discussed above, that resulted in increased costs of $37.9 million compared to the prior year.
Production
Production at our Asia Pacific Iron Ore segment increased 243 thousand metric tons or 2.2 percent during the year ended December 31, 2014 when compared to 2013. The increase in production tons compared to the prior-year period is mainly attributable to increased rail capacity as there were less train delays and better loading procedures implemented to get more tons into each wagon.
North American Coal
The following is a summary of North American Coal results for the years ended December 31, 2014 and 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | | | Change due to: | | |
| | | Year Ended
December 31, | | Revenue and cost rate | | Sales volume | | Inventory write-down | | Freight and reimburse-ment | | Total change |
| | | 2014 | | 2013 | | | | | |
| Revenues from product sales and services | | $ | 687.1 |
| | $ | 821.9 |
| | $ | (176.8 | ) | | $ | 12.8 |
| | $ | — |
| | $ | 29.2 |
| | $ | (134.8 | ) |
| Cost of goods sold and operating expenses | | (822.9 | ) | | (836.4 | ) | | 89.1 |
| | (13.0 | ) | | (33.4 | ) | | (29.2 | ) | | 13.5 |
|
| Sales margin | | $ | (135.8 | ) | | $ | (14.5 | ) | | $ | (87.7 | ) | | $ | (0.2 | ) | | $ | (33.4 | ) | | $ | — |
| | $ | (121.3 | ) |
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | | | | | | | | |
|
| Per Ton Information | | 2014 | | 2013 | | Difference | | Percent change | | | | | | |
Realized product revenue rate1 | | $ | 77.31 |
| | $ | 101.20 |
| | $ | (23.89 | ) | | (23.6 | )% | | | | | | |
| Cash production cost | | 68.64 |
| | 75.27 |
| | (6.63 | ) | | (8.8 | )% | | | | | | |
| Non-production cash cost | | 12.58 |
| | 10.20 |
| | 2.38 |
| | 23.3 | % | | | | | | |
Cost of goods sold and operating expense rate1 (excluding DDA) | | 81.22 |
| | 85.47 |
| | (4.25 | ) | | (5.0 | )% | | | | | | |
| Depreciation, depletion & amortization | | 14.45 |
| | 17.72 |
| | (3.27 | ) | | (18.5 | )% | | | | | | |
| Total cost of goods sold and operating expense rate | | 95.67 |
| | 103.19 |
| | (7.52 | ) | | (7.3 | )% | | | | | | |
| Sales margin | | $ | (18.36 | ) | | $ | (1.99 | ) | | $ | (16.37 | ) | | n/m | | | | | | |
| | | | | | | | | | | | | | | |
Sales tons2 (In thousands) | | 7,400 |
| | 7,274 |
| | | | | | | | | | |
Production tons2 (In thousands) | | 7,536 |
| | 7,221 |
| | | | | | | | | | |
1 Excludes revenues and expenses related to domestic freight, which are offsetting and have no impact on sales margin. |
2 Tons are short tons (2,000 pounds). |
Sales margin for the North American Coal segment decreased to a loss of $135.8$89.2 million during the year ended December 31, 2014,2017, compared to a2016, excluding the freight reimbursements decrease of $1.1 million, predominantly due to:
Decreased sales margin lossvolume of $14.51.8 million duringmetric tons, or 15.7%, to 9.8 million metric tons. The decrease in tons sold was primarily driven by lower production, as discussed below, and unfavorable market conditions which limited the year ended December 31, 2013. Sales margin per ton decreased to a loss of $18.36 per ton in 2014 compared to a sales margin loss of $1.99 per ton in the prior year.
Revenues from producteconomic value on short-term contract sales and services were $687.1 million, which is a decreaseresulted in decreased revenue of $164.0 million over the prior-year period, excluding the increase of $29.2 million of freight and reimbursements, predominantly due to:$81.0 million.
A decrease in ourthe average year-to-date realized product revenue rate of $176.8$0.54 per metric ton or 1.2%, which resulted in a decrease of $8 million, or 23.6 percent on a per-ton basis forincluding the year ended December 31, 2014.impact of foreign exchange. This declineincrease is predominantly a result of:
| |
| ◦ | The downward trendA decrease in market pricing period over period, including a decrease of $33 per ton in the 2014 average benchmark price, along with a more favorable impact in 2013 from carryover contracts; and |
| |
◦ | An unfavorable change in product mix negatively impacting the realized revenue rate by $5of $10 per metric ton primarily attributableor $95 million due to lower domestic sales of high-volatileprice and low-volatile metallurgical coal which required higher export salesquality adjustments to meet market competition and increased sales of thermal coal, both of which are unfavorable to the overall realized revenue rate. |
Partially offset by sales volume increases of 126 thousand tons or 1.7 percent during 2014 in comparison to the prior-year resulting in an increase in revenue of $12.8 million, primarily due to higher thermal coal sales due to a new contract offset by decreased sales of high-volatile metallurgical coal resulting from non-renewal of a customer contract. The decreased sales of high-volatile metallurgical coal was partly mitigated by an increase in export sales.
Cost of goods soldcompensate for varying quality ores and operating expenses in 2014 decreased $42.7 million, excluding the increase of $29.2 million of freight and reimbursements from the comparable period in the prior year, predominantly as a result of:
Decreased spending of $26.6 million on production costs due to increased focus on reducing external services and administrative costs at our low-volatile metallurgical coal mines, a reduction in depreciation, amortization and depletion expense of $21.9 million in 2014 due to the long-lived asset impairments taken during the current year, and decreased costs related to royalties and severance taxes of $14.0 million due to a reduced year-over-year revenue rate; and
The impact of lower-of-cost-or-market inventory charges resulted in lower costs of $15.9 million as inventory was sold.
Partially offset by:
| |
◦ | An unfavorable variance in the lower-of-cost-or-market inventory charge of $33.4 million in comparison to the prior-year period as the lower-of-cost-or-market inventory charges at December 31, 2014 and 2013 were $44.5 million and $11.1 million, respectively;iron content; and |
| |
| ◦ | Higher sales volume attributableaverage Western Australia to additional thermal coal sales, as discussed above, resultedChina freight rates, which unfavorably affected the revenue rate by $3 per metric ton or $26 million. |
| |
| ◦ | This decrease was offset partially by an increase in an additional $13.0 million of costs.the Platts 62% Price, which positively affected the realized revenue rate by $12 per metric ton or $120 million. |
Production
Production of low- and high-volatile metallurgical coal in 2014 was 6.6 million tons, which is consistent with the prior-year production. Due to increased demand for thermal coal in 2014, we increased production at our thermal coal mine from one shift to two shifts in the first quarter of 2014 to align production with customer demand. Thermal coal production was 927 thousand tons during 2014, which is an increase of 46.7 percent compared to the prior year. The increase in thermal coal production was the primary contributor to our increased overall coal production in 2014. Additionally in August 2014, the Oak Grove mine set its one-day production record by producing 14 thousand tons in one day.
In the fourth quarter of 2014, we sold our CLCC assets. Production tons at CLCC were 2.5 million tons and 2.1 million tons for the years ended December 31, 2014 and 2013, respectively, and are included in the production tons disclosed above.
Eastern Canadian Iron Ore
The following is a summary of Eastern Canadian Iron Ore results for the years ended December 31, 2014 and 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | | | Change due to: | | |
| | | Year Ended
December 31, | | Revenue and cost rate | | Sales volume | | Wabush idle 2 | | Inventory write-down | | Exchange rate | | Total change |
| | | 2014 | | 2013 | | | | | | |
| Revenues from product sales and services | | $ | 563.4 |
| | $ | 978.7 |
| | $ | (182.4 | ) | | $ | 55.1 |
| | $ | (288.0 | ) | | $ | — |
| | $ | — |
| | $ | (415.3 | ) |
| Cost of goods sold and operating expenses | | (808.3 | ) | | (1,082.0 | ) | | 10.7 |
| | (57.5 | ) | | 304.4 |
| | (23.4 | ) | | 39.5 |
| | 273.7 |
|
| Sales margin | | $ | (244.9 | ) | | $ | (103.3 | ) | | $ | (171.7 | ) | | $ | (2.4 | ) | | $ | 16.4 |
| | $ | (23.4 | ) | | $ | 39.5 |
| | $ | (141.6 | ) |
| | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | |
| |
| |
| |
| |
| | |
| Per Ton Information | | 2014 | | 2013 | | Difference | | Percent change | | | | | | | | |
Realized product revenue rate 3 | | 81.19 |
| | $ | 110.79 |
| | $ | (29.60 | ) | | (26.7 | )% | | | | | | | | |
| Cash production cost | | 81.04 |
| | 86.20 |
| | (5.16 | ) | | (6.0 | )% | | | | | | | | |
| Non-production cash cost | | 10.50 |
| | 3.67 |
| | 6.83 |
| | 186.1 | % | | | | | | | | |
Cost of goods sold and operating expense rate (excluding DDA) 3 | | 91.54 |
| | 89.87 |
| | 1.67 |
| | 1.9 | % | | | | | | | | |
Depreciation, depletion & amortization 3 | | 19.78 |
| | 25.79 |
| | (6.01 | ) | | (23.3 | )% | | | | | | | | |
Total cost of goods sold and operating expense rate 3 | | 111.32 |
| | 115.66 |
| | (4.34 | ) | | (3.8 | )% | | | | | | | | |
Sales margin 3 | | $ | (30.13 | ) | | $ | (4.87 | ) | | $ | (25.26 | ) | | n/m | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Bloom Lake sales tons | | 6,162 |
| | 5,665 |
| | | | | | | | | | | | |
| Wabush sales tons | | 1,066 |
| | 2,886 |
| | | | | | | | | | | | |
Sales tons1 (In thousands) | | 7,228 |
| | 8,551 |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Bloom Lake production tons | | 5,940 |
| | 5,877 |
| | | | | | | | | | | | |
| Wabush production tons | | 280 |
| | 2,778 |
| | | | | | | | | | | | |
Production tons1 (In thousands) | | 6,220 |
| | 8,655 |
| | | | | | | | | | | | |
1 Tons are metric tons (2,205 pounds). |
2 As a result of the Wabush mine idle, all revenue and cost activity related to the Wabush mine has been quantified in the Wabush idle column of the chart above. |
3 As a result of the Wabush mine idle, all revenue and cost activity related to the Wabush mine has been excluded from the Per Ton Information above. Per Ton Information relates to the Bloom Lake mine only. |
We reported a sales margin loss for our Eastern Canadian Iron Ore segment of $244.9 million for the year ended December 31, 2014, compared with a sales margin loss of $103.3 million for the year ended December 31, 2013. Sales margin per metric ton for the Bloom Lake mine increased to a loss of $30.13 per metric ton for the year ended December 31, 2014 compared to a sales margin loss of $4.87 per metric ton for 2013.
Revenue decreased by $415.3 million for the year ended December 31, 2014 when compared to prior year, primarily due to:
A reduction in revenue of $288.0 million due to idling of the Wabush Scully mine in Newfoundland and Labrador at the end of March 2014 and the idling of the Wabush pellet plant in June 2013; and
An overall decrease to the Bloom Lake mine average realized revenue rate, which resulted in a decrease of $182.4 million, primarily as a result of a decrease in the Platts 62 percent Fe fines spot price to an average of $97 per ton from $135 per ton in the prior year,
Partially offset by higher sales volumes at the Bloom Lake mine of 497 thousand tons resulting in an increase to revenue of $55.1 million, which was primarily related to the timing of customer shipments that were delayed from the end of 2013 into 2014 as a result of adverse weather conditions.
Cost of goods sold and operating expenses decreased $11.9 million during the year ended December 31, 20142017, compared to 2016, excluding the freight and reimbursements decrease of $1.1 million, predominantly as a result of:
A decrease in sales volume of 1.8 million metric tons, which decreased from 2013costs by $273.7 million primarily due to:$69.3 million.
LowerThis decrease was offset partially by an increase in production costs of $304.4$37.6 million or $4 per metric ton, predominantly due to idling the Wabush pellet plantincreased mining costs driven by a higher strip ratio, increased administrative costs and higher rail and port rates;
An unfavorable asset retirement obligation adjustment of $7.9 million or $1 per long ton driven by an increase in June 2013 and idling of the Wabush Scully mine in Newfoundland and Labradorexpected costs to be incurred at the end of March 2014;life of mine; and
FavorableUnfavorable foreign exchange rate variances of $39.5 million; and
Reduced costs mainly attributable to lower depreciation, depletion and amortization costs of $24.2$11.9 million year-over-year primarily as a result of long-lived asset impairments taken in the third quarter of 2014 along with reduced spending on external services,or $1 per metric ton.
Partially offset by:
| |
◦ | Higher sales volumes at the Bloom Lake facilities as discussed above resulting in increased costs of $57.5 million compared to the prior-year period; |
| |
◦ | Unfavorable foreign exchange contract hedging impacts of $13.6 million year-over-year driven by the de-designation of foreign currency hedges; and |
| |
◦ | An unfavorable variance of $23.4 million in lower-of-cost-or-market inventory charges at our Bloom Lake operation. Lower-of-cost-or-market charges were $27.9 million in 2014, primarily attributable to market declines in Platts spot rate pricing as well as higher cost of inventory driven by the timing of maintenance activities and mine development up until production ceased at Bloom Lake and the mine entered "care-and-maintenane" mode on December 31, 2014. The Bloom Lake mine had lower-of-cost-or-market inventory charges of $4.5 million in 2013. |
Production
The Bloom Lake facility produced 5.9 million tons of iron ore concentrate in each of the years ended December 31, 2014 and 2013, respectively. As we have previously disclosed, despite our cost-cutting progressProduction volume at our Bloom Lake mine, we have concluded that Phase I alone is not economically feasible based on our current operating plans. We also determined that the Phase II expansion of the Bloom Lake mine was no longer a viable option for us and we shifted our focus to considering available possibilities and executing an exit option for Eastern CanadianAsia Pacific Iron Ore operations that minimizes the cash outflows and associated liabilities. In December 2014, iron ore production at the Bloom Lake mine was suspended and the Bloom Lake mine was placed in ‘‘care-and-maintenance’’ mode.
Production at the Wabush facility was 0.3mining complex decreased by 14.6% or 1.7 million metric tons of iron ore concentrate during the year ended December 31, 20142017, compared to 2016, driven by operational decisions to reflect current market conditions and 1.6 million tons of ironquality ore concentrate and 1.2 million tons of iron ore pellets during the year end December 31, 2013, respectively. Due to high production costs and lower pellet premium pricing, we idled production at the Wabush pellet plant and transitioned to producing an iron ore concentrate product from our Wabush Scully mine during June 2013. At the end of March 2014, we idled our Wabush Scully mine in Newfoundland and Labrador and began to implement the permanent closure plan for the mine in the fourth quarter of 2014.availability.
20132016 Compared to 20122015
| | | | (In Millions) | (In Millions) |
| | 2013 | | 2012 | 2016 | | 2015 |
| | | | | | | |
| Net Income (Loss) | $ | 361.8 |
| | $ | (1,126.6 | ) | $ | 199.3 |
| | $ | (748.4 | ) |
| Less: | | | | | | |
| Interest expense, net | (179.1 | ) | | (195.6 | ) | (200.5 | ) | | (231.4 | ) |
| Income tax benefit (expense) | (55.1 | ) | | (255.9 | ) | 12.2 |
| | (163.3 | ) |
| Depreciation, depletion and amortization | (593.3 | ) | | (525.8 | ) | (115.4 | ) | | (134.0 | ) |
| EBITDA | $ | 1,189.3 |
| | $ | (149.3 | ) | $ | 503.0 |
| | $ | (219.7 | ) |
| Less: | | | | | | |
| Impairment of goodwill and other long-lived assets | $ | (250.8 | ) | | $ | (1,049.9 | ) | |
| Impairment of equity method investment | — |
| | (365.4 | ) | |
| Loss on sale of Cliffs Logan County Coal | — |
| | — |
| |
| Wabush mine impact | (72.7 | ) | | (30.1 | ) | |
| Bloom Lake mine impact | 46.5 |
| | 6.4 |
| |
| Gain on extinguishment/restructuring of debt | | $ | 166.3 |
| | $ | 392.9 |
|
| Impact of discontinued operations | | (19.9 | ) | | (892.0 | ) |
| Foreign exchange remeasurement | 64.0 |
| | (3.2 | ) | (16.8 | ) | | 16.3 |
|
| Proxy contest and change in control costs in SG&A | — |
| | — |
| |
| Litigation judgment | (9.6 | ) | | — |
| |
| Severance in SG&A | (16.4 | ) | | — |
| |
| Severance and contractor termination costs | | (0.1 | ) | | (10.2 | ) |
| Supplies inventory write-off | | — |
| | (16.3 | ) |
| Impairment of other long-lived assets | | — |
| | (3.3 | ) |
| Total Adjusted EBITDA | $ | 1,428.3 |
| | $ | 1,292.9 |
| $ | 373.5 |
| | $ | 292.9 |
|
| | | | | | | |
| EBITDA: | | | | | | |
| U.S. Iron Ore | $ | 1,000.1 |
| | $ | 1,045.3 |
| $ | 342.4 |
| | $ | 317.6 |
|
| Asia Pacific Iron Ore | 500.4 |
| | 387.3 |
| 128.3 |
| | 35.3 |
|
| North American Coal | 129.5 |
| | 74.0 |
| |
| Eastern Canadian Iron Ore | (192.8 | ) | | (1,103.3 | ) | |
| Other | (247.9 | ) | | (552.6 | ) | |
| Other (including discontinued operations) | | 32.3 |
| | (572.6 | ) |
| Total EBITDA | $ | 1,189.3 |
| | $ | (149.3 | ) | $ | 503.0 |
| | $ | (219.7 | ) |
| | | | | | | |
| Adjusted EBITDA: | | | | | | |
| U.S. Iron Ore | $ | 1,030.8 |
| | $ | 1,085.6 |
| $ | 359.6 |
| | $ | 352.1 |
|
| Asia Pacific Iron Ore | 525.7 |
| | 402.1 |
| 132.9 |
| | 32.7 |
|
| North American Coal | 154.0 |
| | 106.7 |
| |
| Eastern Canadian Iron Ore | — |
| | — |
| |
| Other | (282.2 | ) | | (301.5 | ) | (119.0 | ) | | (91.9 | ) |
| Total Adjusted EBITDA | $ | 1,428.3 |
| | $ | 1,292.9 |
| $ | 373.5 |
| | $ | 292.9 |
|
EBITDA for the year endedDecember 31, 20132016 increased by $1,338.6$722.7 million on a consolidated basis from 2012.2015. The increaseperiod-over-period change primarily was primarily driven by the favorable fluctuation in goodwill and long-lived asset impairment charges recordedimpact of our discontinued operations during 2013 compared to 2012 for the Eastern Canadian Iron Ore segment. For the yearsyear ended December 31, 2013 and 2012, we recorded goodwill and long-lived asset impairment charges of $154.6 million and $1,049.9 million, respectively, related to the Eastern Canadian Iron Ore segment. Additionally, lower exploration and SG&A expense of $134.7 million when comparing 2013 to 2012 positively impacted EBITDA and was a main driver in the change of2015. Adjusted EBITDA which increased by $135.4$80.6 million for the year endedDecember 31, 20132016 from 2012.2015. The period-over-period change is a result of operational efficiencies and cost-cutting efforts across each of our business units. See further detail below for additional information regarding the specific factors that impacted the sales margin of each reportable segmentsegment's sales margin during 2013.2016.
U.S. Iron Ore
FollowingThe following is a summary of U.S. Iron Ore results for the years ended December 31, 20132016 and 2012:2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| | | | Change due to | |
| | Year Ended
December 31, | | Revenue and cost rate | | Sales volume | | Idle cost/Production volume variance | | Freight and reimburse-ment | | Total change |
| | 2013 | | 2012 | | | | | |
| Revenues from product sales and services | $ | 2,667.9 |
| | $ | 2,723.3 |
| | $ | (24.5 | ) | | $ | (39.6 | ) | | $ | — |
| | $ | 8.7 |
| | $ | (55.4 | ) |
| Cost of goods sold and operating expenses | (1,766.0 | ) | | (1,747.1 | ) | | 11.7 |
| | 10.4 |
| | (32.3 | ) | | (8.7 | ) | | (18.9 | ) |
| Sales margin | $ | 901.9 |
|
| $ | 976.2 |
| | $ | (12.8 | ) | | $ | (29.2 | ) | | $ | (32.3 | ) | | $ | — |
| | $ | (74.3 | ) |
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | | | | | |
| Per Ton Information | 2013 | | 2012 | | Difference | | Percent change | | | | | | |
Realized product revenue rate1 | $ | 113.08 |
| | $ | 114.29 |
| | $ | (1.21 | ) | | (1.1 | )% | | | | | | |
| Cash production cost | 64.65 |
| | 63.28 |
| | 1.37 |
| | 2.2 | % | | | | | | |
| Non-production cash cost | 0.43 |
| | 1.22 |
| | (0.79 | ) | | (64.8 | )% | | | | | | |
Cost of goods sold and operating expenses rate1 (excluding DDA) | 65.08 |
| | 64.50 |
| | 0.58 |
| | 0.9 | % | | | | | | |
| Depreciation, depletion & amortization | 5.65 |
| | 4.66 |
| | 0.99 |
| | 21.2 | % | | | | | | |
| Total cost of goods sold and operating expenses rate | 70.73 |
| | 69.16 |
| | 1.57 |
| | 2.3 | % | | | | | | |
| Sales margin | $ | 42.35 |
| | $ | 45.13 |
| | $ | (2.78 | ) | | (6.2 | )% | | | | | | |
| | | | | | | | | | | | | | |
Sales tons 2 (In thousands) | 21,299 |
| | 21,633 |
| | | | | | | | | | |
Production tons 2 (In thousands) | | | | | | | | | | | | | |
| Total | 27,234 |
| | 29,526 |
| | | | | | | | | | |
| Cliffs’ share of total | 20,271 |
| | 21,992 |
| | | | | | | | | | |
1 Excludes revenues and expenses related to domestic freight, which are offsetting and have no impact on sales margin. Revenues also exclude venture partner cost reimbursements. |
2 Tons are long tons (2,240 pounds). |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | | | Change due to | |
| | | Year Ended
December 31, | | Revenue and cost rate | | Sales volume | | Idle cost/production volume variance | | Freight and reimburse-ment | | Total change |
| | | 2016 | | 2015 | | | | | |
| Revenues from product sales and services | | $ | 1,554.5 |
| | $ | 1,525.4 |
| | $ | (62.0 | ) | | $ | 73.5 |
| | $ | — |
| | $ | 17.6 |
| | $ | 29.1 |
|
| Cost of goods sold and operating expenses | | (1,278.8 | ) | | (1,298.3 | ) | | 84.7 |
| | (55.4 | ) | | 7.8 |
| | (17.6 | ) | | 19.5 |
|
| Sales margin | | $ | 275.7 |
|
| $ | 227.1 |
| | $ | 22.7 |
| | $ | 18.1 |
| | $ | 7.8 |
| | $ | — |
| | $ | 48.6 |
|
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | |
| Per Long Sales Ton Information | | 2016 | | 2015 | | Difference | | Percent change |
Realized product revenue rate1 | | $ | 75.71 |
| | $ | 79.12 |
| | $ | (3.41 | ) | | (4.3 | )% |
Cash cost of goods sold and operating expense rate1,2 | | 55.97 |
| | 60.27 |
| | (4.30 | ) | | (7.1 | )% |
| Depreciation, depletion & amortization | | 4.61 |
| | 5.72 |
| | (1.11 | ) | | (19.4 | )% |
| Total cost of goods sold and operating expenses rate | | 60.58 |
| | 65.99 |
| | (5.41 | ) | | (8.2 | )% |
| Sales margin | | $ | 15.13 |
| | $ | 13.13 |
| | $ | 2.00 |
| | 15.2 | % |
| | | | | | | | | |
Sales tons3 (In thousands) | | 18,224 |
| | 17,292 |
| | | | |
Production tons3 (In thousands) | | | | | | | | |
| Total | | 23,416 |
| | 26,138 |
| | | | |
| Cliffs’ share of total | | 15,982 |
| | 19,317 |
| | | | |
| | | | | | | | | |
1 Excludes revenues and expenses related to domestic freight, which are offsetting and have no impact on sales margin. Revenues and expenses also exclude venture partner cost reimbursements. |
2 Cash cost of goods sold and operating expense rate is a non-GAAP financial measure. See "Non-GAAP Reconciliation" for reconciliation in dollars back to our consolidated financial statements. |
3 Tons are long tons (2,240 pounds). |
Sales margin for U.S. Iron Ore was $901.9$275.7 million for the year ended December 31, 2013,2016, compared with the sales margin of $976.2$227.1 million for the year ended December 31, 2012.2015. The declineincrease compared to the prior year is attributable to a decreasean increase in revenue of $55.4$29.1 million as well as an increasein addition to a decrease in cost of goods sold and operating expenses of $18.9$19.5 million. Sales margin increased 15.2% to $15.13 per long ton decreased 6.2 percent to $42.35 during the year ended December 31, 20132016 compared to 2012.2015.
Revenue decreasedincreased by $64.1$11.5 million, excluding the increase of $8.7$17.6 million of freight and reimbursements, from the prior year, predominantly due to:
LowerHigher sales volumes of 334 thousand0.9 million long tons, or $39.6 million:which resulted in increased revenues of $73.5 million due to:
| |
| ◦ | Primarily driven by the expirationAdditional short-term contracts in 2016 with two customers, one which we made no sales to in 2015, providing additional sales volume of one contract with a continuing customer, a lower full-year nomination by a customer, reduced tonnage with a customer due to their force majeure and the bankruptcy of one customer in 2012,2.4 million long tons. |
| |
| ◦ | PartiallyThis increase was offset partially by a 1.3 million net reduction in long tons from the placementtermination of an additional 1.2 million export tons primarily duea customer contract in the fourth quarter of the prior year that was reinstated in June 2016, to pelletbegin in 2017, and nominations on short-term contracts transferred from Wabush as well as trial and spot cargoesmade with the customer in Europe during 2013the interim. |
when compared to the prior year. We additionally benefited from additional customer demand, specifically additional spot contracts with a major customer in the Great Lakes region.
A decline in the average revenue rate, which resulted in a decrease of $24.5 million also was a contributing factor to the decrease in year-over-year revenues. The average year-to-date realized product revenue rate declined by $1.21$3.41 per long ton or 1.1 percent4.3% to $113.08$75.71 per long ton in 2013. Thisthe year ended December 31, 2016, which resulted in a decrease of $62.0 million, compared to the prior year. The decline is a result of:
| |
| ◦ | UnfavorableChanges in customer mix impactedpricing negatively affected the realized revenue ratesrate by $3$2 per long ton or $32 million driven primarily by the negative inflation of certain price indices; |
| |
| ◦ | An unfavorable variance of $30 million or $2 per long ton due to higher sales tonnage to overseas customers, which haveoverall net lower realized revenuecontracted pricing terms for two short-term customer contracts that were based on fixed negotiated rates driven by additional transportation costs to move inventory from the U.S. Iron Ore mine locationscompared to the international port locations in Québec,prior-year which reduces our realized revenue rate per ton;was based on a different method; and |
| |
| ◦ | Realized revenue rates were impacted negatively byAn unfavorable change of $17 million or $1 per long ton as a resultresulting from various price adjustments, unfavorable customer mix and net of discounts given during 2013 as a part of recently extended contracts,increased service revenue. |
| |
| ◦ | PartiallyThese decreases were offset partially by an increase in realized revenue rates of $1 per long ton or $17 million as a result of one major customer contract that increasedwith a pricing mechanism tied to the average rate by $3 per tonfull-year estimate of their hot-rolled coil steel pricing. The increase in revenue is primarily due to the resethot-rolled coil steel estimate increasing in 2016 from the beginning of their contract base rate.the year, compared to 2015 when the estimate was revised lower. |
Cost of goods sold and operating expenses in 2013 increased $10.2decreased $37.1 million or $2.04 per long ton, excluding the increasedecrease of $8.7$17.6 million of freight and reimbursements compared tofrom the prior year, predominantly as a result of:
HigherLower maintenance and repair costs resulting from cost reduction initiatives and condition based monitoring and Empire's indefinite idle, costswhich began in August 2016 of $32.3$28 million due to the previously announced temporary idling of production at the Empire mine and the idle of two of the four production lines at our Northshore mine, offset by;$2 per long ton;
Lower sales volumes decreased costs by $10.4 million compared to the prior year;
Lower costs of $12.0 million attributable to timing of tolling cost distribution to Empire mine partner ArcelorMittal when compared to the prior year; and
Lower costs of $11.6 million due to aA year-over-year reduction in electrical energy rates at Empire and Tilden mines as a result of switching energy suppliers, reduced contractor spend of $29.4 million and optimized maintenance spend of $21.1 million and partially offset by increased costs of $16.6 million due to higher rates for natural gas and diesel, which lowered costs by $16 million or $1 per long ton and a reduction of employment costs of $12 million or $1 per long ton; and
Various one-time adjustments totaling $28 million or $2 per long ton impacted the year ended December 31, 2016 compared to the previous year, including a positive asset retirement obligation adjustment for a life of mine extension during 2016 of $9 million or $1 per long ton, and a supplies inventory adjustment that occurred in 2015 that was not repeated in 2016 of $15 million or $1 per long ton.
These decreases were offset partially by increased sales volume as well asdiscussed above that increased costs by $55 million or $3 per long ton, in addition to an unfavorable impact from LIFO liquidation of $17.5$9 million related to deeper pit hauls asor $1 per long ton, compared to 2012.the prior year.
Production
Cliffs'Our share of production tons in our U.S. Iron Ore segment decreased by 7.8 percent during the year ended December 31, 20133.3 million long tons or 17.3% when compared to 2012. Beginning on January 5, 2013, we2015. The decrease in production volumes primarily is attributable to the idled twomining facilities. Our United Taconite operation was idled in August 2015, until it was restarted again in August 2016. As a result, our United Taconite operation was in full production for one-third of the year versus operating at full production for two-thirds of the prior year causing a decrease in production volume of 1.5 million long tons. Secondly, our Northshore mining operations were fully idled, including all four furnaces at the Northshore mine for the remainder of 2013 and into the first quarter of 2014, which resulted in decreased production of 1.4 million tons whenfrom November 2015 until May 2016, compared to running a three furnace operation for most of 2015 until the year ended December 31, 2012. During the first quarter of 2014, we restarted the two idled furnaces.full idle began in November 2015, reducing production by 1.0 million long tons during 2016.
Asia Pacific Iron Ore
FollowingThe following is a summary of Asia Pacific Iron Ore results for the years ended December 31, 20132016 and 2012:2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| | Year Ended December 31, | | Change due to | | |
| | Revenue and cost rate | | Sales Volume | | Completion of Cockatoo Mining Stage 3 | Exchange Rate | | Total change |
| | 2013 | | 2012 | | | | |
| Revenues from product sales and services | $ | 1,224.3 |
| | $ | 1,259.3 |
| | $ | 39.5 |
| | $ | (0.2 | ) | | $ | (77.0 | ) | $ | 2.7 |
| | $ | (35.0 | ) |
| Cost of goods sold and operating expenses | (857.2 | ) | | (948.3 | ) | | (22.2 | ) | | 0.2 |
| | 51.2 |
| 61.9 |
| | 91.1 |
|
| Sales margin | $ | 367.1 |
|
| $ | 311.0 |
|
| $ | 17.3 |
|
| $ | — |
|
| $ | (25.8 | ) | $ | 64.6 |
|
| $ | 56.1 |
|
| |
| | Year Ended December 31, | | | | | | | | | |
| Per Ton Information | 2013 | | 2012 | | Difference | | Percent change | | | | | |
| Realized product revenue rate | $ | 110.87 |
| | $ | 107.81 |
| | $ | 3.06 |
| | 2.8 | % | | | | | |
| Cash production cost | 58.02 |
| | 62.02 |
| | (4.00 | ) | | (6.4 | )% | | | | | |
| Non-production cash cost | 5.69 |
| | 6.16 |
| | (0.47 | ) | | (7.6 | )% | | | | | |
| Cost of goods sold and operating expenses rate (excluding DDA) | 63.71 |
| | 68.18 |
| | (4.47 | ) | | (6.6 | )% | | | | | |
| Depreciation, depletion & amortization | 13.92 |
| | 13.00 |
| | 0.92 |
| | 7.1 | % | | | | | |
| Total cost of goods sold and operating expenses rate | 77.63 |
| | 81.18 |
| | (3.55 | ) | | (4.4 | )% | | | | | |
| Sales margin | $ | 33.24 |
| | $ | 26.63 |
| | $ | 6.61 |
| | 24.8 | % | | | | | |
| | | | | | | | | | | | | |
Sales tons 1 (In thousands) | 11,043 |
| | 11,681 |
| | | | | | | | | |
Production tons 1 (In thousands) | 11,109 |
| | 11,260 |
| | | | | | | | | |
1 Metric tons (2,205 pounds). Cockatoo Island production and sales are reflected at our 50 percent share during the first half of 2012. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | | | Change due to | | |
| | Year Ended December 31, | | Revenue and cost rate | | Sales volume | | Exchange rate | | Freight and reimburse-ment | | Total change |
| | | 2016 | | 2015 | | | | |
| Revenues from product sales and services | | $ | 554.5 |
| | $ | 487.9 |
| | $ | 69.2 |
| | $ | 0.7 |
| | $ | (0.4 | ) | | $ | (2.9 | ) | | $ | 66.6 |
|
| Cost of goods sold and operating expenses | | (440.9 | ) | | (478.5 | ) | | 29.8 |
| | (0.6 | ) | | 5.5 |
| | 2.9 |
| | 37.6 |
|
| Sales margin | | $ | 113.6 |
|
| $ | 9.4 |
|
| $ | 99.0 |
|
| $ | 0.1 |
|
| $ | 5.1 |
| | $ | — |
|
| $ | 104.2 |
|
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | |
| Per Metric Sales Ton Information | | 2016 | | 2015 | | Difference | | Percent change |
Realized product revenue rate1 | | $ | 45.85 |
| | $ | 39.93 |
| | $ | 5.92 |
| | 14.8 | % |
Cash cost of goods sold and operating expense rate1,2 | | 33.94 |
| | 36.95 |
| | (3.01 | ) | | (8.1 | )% |
| Depreciation, depletion & amortization | | 2.16 |
| | 2.18 |
| | (0.02 | ) | | (0.9 | )% |
| Total cost of goods sold and operating expenses rate | | 36.10 |
| | 39.13 |
| | (3.03 | ) | | (7.7 | )% |
| Sales margin | | $ | 9.75 |
| | $ | 0.80 |
| | $ | 8.95 |
| | 1,118.8 | % |
| | | | | | | | | |
Sales tons3 (In thousands) | | 11,642 |
| | 11,627 |
| | | | |
Production tons3 (In thousands) | | 11,839 |
| | 11,722 |
| | | | |
| | | | | | | | | |
| 1 The information above excludes revenues and expenses related to freight, which are offsetting and have no impact on sales margin. |
2 Cash cost of goods sold and operating expense rate is a non-GAAP financial measure. See "Non-GAAP Reconciliation" for reconciliation in dollars back to our consolidated financial statements. |
3 Metric tons (2,205 pounds). |
Sales margin for our Asia Pacific Iron Ore segment increased to $367.1$113.6 million during the year ended December 31, 20132016 compared with $311.0$9.4 million for 2015. The increase compared to the same period in 2012.prior year primarily is attributable to higher revenue of $66.6 million and lower cost of goods sold and operating expenses of $37.6 million. Sales margin per metric ton increased 24.8 percent1,118.8% to $33.24$9.75 per metric ton in 20132016 compared to 2012.2015.
Revenue decreasedincreased by $35.0$69.5 million during the year ended December 31, 20132016 over the prior year, excluding the decrease of $2.9 million of freight and reimbursements, primarily as a result of:
The completion of the mining of Stage 3 at Cockatoo and the sale of our interest at the end of the third quarter of 2012, resulting in a revenue decrease of $77.0 million or 636 thousand metric tons compared to the prior year.
These decreases were offset partially by an increase in ouraverage year-to-date realized product revenue rate for the year ended December 31, 2013 that resulted in an increase of $39.5 millionincreased $5.92 per metric ton or 2.8 percent on a per-ton basis. This increase is driven mainly by:
| |
◦ | The Platts 62 percent Fe index increased to an average of $13514.8% to $45.85 per metric ton, from $130 per metric ton during the prior year, which positively impacted the revenue rate resulting in an increase of $56.6 million or $5 per metric ton to our realized revenue rate; and |
| |
◦ | The low-grade iron ore sales campaign in 2012 that did not recur in 2013, which positively impacted the revenue rate variance resulting in an increase of $40.6 million or $4 per metric ton, |
| |
◦ | Offset by a reduction to our realized revenue rate due to: |
| |
▪ | Unfavorable change in foreign exchange contract hedging impacts of $26.7 million or $2 per metric ton period over period; and |
| |
▪ | Lower iron ore content on standard product in 2013 resulting in a reduction of realized product revenue rate of $22.7 million or $2 per metric ton. |
Cost of goods sold and operating expenses in the year ended December 31, 2013 decreased $91.1 million compared to 2012 primarily as a result of:
The completion of the mining of Stage 3 at Cockatoo and the sale of our interest at the end of the third quarter of 2012, resulting in a decrease in costs of $51.2 million in 2013 compared to the prior year; and
Favorable foreign exchange rate variances of $61.9 million or $6 per metric ton.
Partially offset by higher logistics costs of $29.6 million mainly attributable to higher railed tons and higher ship-loading handling charges in 2013 slightly mitigated by lower mining and crushing costs of $6.6 million due to improved efficiencies.
Production
Production at our Asia Pacific Iron Ore segment decreased 151 thousand metric tons or 1.3 percent during the year ended December 31, 2013 when compared to 2012. We completed the mining of Stage 3 at Cockatoo and sold our interest during the third quarter of 2012, resulting in a decrease of 590 thousand metric tons in total production during the year 2013 compared to 2012. The decrease was offset partially by the increased production of 439 thousand metric tons at Koolyanobbing in 2013 resulting from the completion of the Koolyanobbing expansion project during mid-2012, which provided additional ore processing and rail and port capabilities that drove performance increases at this mine.
North American Coal
Following is a summary of North American Coal results for the years ended December 31, 2013 and 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| | | | Change due to: | | |
| | Year Ended
December 31, | | Revenue and cost rate | | Sales Volume | | Freight and reimburse-ment | | Total change |
| | 2013 | | 2012 | | | | |
| Revenues from product sales and services | $ | 821.9 |
| | $ | 881.1 |
| | $ | (135.1 | ) | | $ | 91.1 |
| | $ | (15.2 | ) | | $ | (59.2 | ) |
| Cost of goods sold and operating expenses | (836.4 | ) | | (882.9 | ) | | 122.1 |
| | (90.8 | ) | | 15.2 |
| | 46.5 |
|
| Sales margin | $ | (14.5 | ) | | $ | (1.8 | ) | | $ | (13.0 | ) | | $ | 0.3 |
| | $ | — |
| | $ | (12.7 | ) |
| | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | | | |
| Per Ton Information | 2013 | | 2012 | | Difference | | Percent change | | | | |
Realized product revenue rate1 | $ | 101.20 |
| | $ | 119.79 |
| | $ | (18.59 | ) | | (15.5 | )% | | | | |
| Cash production cost | 75.27 |
| | 92.34 |
| | (17.07 | ) | | (18.5 | )% | | | | |
| Non-production cash cost | 10.20 |
| | 12.65 |
| | (2.45 | ) | | (19.4 | )% | | | | |
Cost of goods sold and operating expenses rate1 (excluding DDA) | 85.47 |
| | 104.99 |
| | (19.52 | ) | | (18.6 | )% | | | | |
| Depreciation, depletion & amortization | 17.72 |
| | 15.08 |
| | 2.64 |
| | 17.5 | % | | | | |
| Total cost of goods sold and operating expenses rate | 103.19 |
| | 120.07 |
| | (16.88 | ) | | (14.1 | )% | | | | |
| Sales margin | $ | (1.99 | ) | | $ | (0.28 | ) | | $ | (1.71 | ) | | n/m | | | | |
| | | | | | | | | | | | |
Sales tons 2 (In thousands) | 7,274 |
| | 6,512 |
| | | | | | | | |
Production tons 2 (In thousands) | 7,221 |
| | 6,394 |
| | | | | | | | |
1 Excludes revenues and expenses related to domestic freight, which are offsetting and have no impact on sales margin. |
2 Tons are short tons (2,000 pounds). |
Sales margin for the North American Coal segment decreased to a loss of $14.5 million during the year ended December 31, 2013, compared to a sales margin loss of $1.8 million during the year ended December 31, 2012. Sales margin per ton decreased to a loss of $1.99 per ton in 2013 compared to a sales margin loss of $0.28 per ton in the prior year.
Revenues from product sales and services were $821.9 million, which is a decrease of $44.0 million over the prior-year period, excluding the decrease of $15.2 million of freight and reimbursements, predominantly due to:
A decrease in our realized product revenue rate of $135.1 million or 15.5 percent on a per-ton basis for the year ended December 31, 2013. This decline is a result of:
| |
◦ | The downward trend in market pricing period over period, including a 24 percent decrease in the quarterly benchmark price, partially mitigated by annually priced contracts, carryover contracts and product mix from our high-volatile metallurgical coal, |
| |
◦ | Slightly offset by a shift in product sales mix. The sales mix for low-volatile metallurgical, high-volatile metallurgical and thermal coal was 69.6 percent, 21.6 percent and 8.8 percent, respectively, in 2013 compared to 68.1 percent, 19.9 percent and 12.0 percent, respectively, for 2012. The total mix impact was favorable by $1 per ton based on the higher price of low-volatile coal and lower rates for thermal coal. |
Partially offset by a sales volume increase of 762 thousand tons or 11.7 percent during the year ended December 31, 2013 in comparison to the prior year resulted in an increase in revenue of $91.1 million, primarily due to:
| |
◦ | Increases in low-volatile and high-volatile metallurgical coal sales of 907 thousand tons in 2013 due to increased production volumes when compared to the prior year and the force majeure related to the April 2011 tornado that extended into April 2012, |
| |
◦ | Partially offset by a reduction in thermal coal sales of 145 thousand tons due to reduced market demand. |
Cost of goods sold and operating expenses in 2013 decreased $31.3 million, excluding the decrease of $15.2 million of freight and reimbursements from the prior year, predominantly as a result of:
Decreased costs related to labor of approximately $40.0 million and maintenance and external services of approximately $75.0 million at our mines with full operating production in 2012 and 2013 due to reduced headcount, cost savings measures and more effective operating efficiency; and
Favorable variance in the lower-of-cost-or-market inventory charge of $13.3 million in comparison to the prior year as the lower-of-cost-or-market inventory charges at December 31, 2013 and 2012 were $11.1 million and $24.4 million, respectively,
Partially offset by higher sales volume attributable to additional low-volatile and high-volatile metallurgical coal sales, as discussed above, resulted in an additional $90.8 million of costs; and
The accelerated closure of the Dingess-Chilton mine during the first quarter of 2013 and Lower War Eagle mine moving into the production stage of mining in November 2012 resulted in the recording of $18.0 million or $2 per ton of additional depreciation and depletion during 2013.
Production
Production of low- and high-volatile metallurgical coal increased 18.2 percent in 2013 compared to 2012. Low-volatile production increased 803 thousand tons over the prior year due to improved operating efficiency. High-volatile metallurgical coal production levels in 2013 increased 212 thousand tons or 16.3 percent as a result of the Lower War Eagle mine moving into production during the fourth quarter of 2012, offset partially by the closure of Dingess-Chilton during the first quarter of 2013. Beginning in the second quarter of 2012 and continuing through 2013, we experienced a decline in demand for thermal coal. Accordingly, over this time period, we reduced production at our thermal mine to one shift to align production with customer demands. This resulted in reduced production of 188 thousand tons in 2013 compared to 2012. Due to increased thermal coal demand in 2014, we increased production at our thermal coal mine to two shifts beginning in the first quarter of 2014 to align production with 2014 customer demand. In the fourth quarter of 2014, we sold our CLCC assets. Production tons at CLCC were 2.1 million tons and 2.1 million tons for the years ended December 31, 2013 and 2012, respectively, and are included in the production tons disclosed above.
Eastern Canadian Iron Ore
Following is a summary of Eastern Canadian Iron Ore results for the years ended December 31, 2013 and 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| | | | Change due to | | |
| | Year Ended
December 31, | | Revenue and cost rate | | Sales Volume | | Idle cost / Production volume variance | | Inventory write-down | | Exchange Rate | | Total change |
| | 2013 | | 2012 | | | | | | |
| Revenues from product sales and services | $ | 978.7 |
| | $ | 1,008.9 |
| | $ | 27.7 |
| | $ | (57.9 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (30.2 | ) |
| Cost of goods sold and operating expenses | (1,082.0 | ) | | (1,130.3 | ) | | 32.1 |
| | 53.4 |
| | 26.3 |
| | (72.5 | ) | | 9.0 |
| | 48.3 |
|
| Sales margin | $ | (103.3 | ) |
| $ | (121.4 | ) | | $ | 59.8 |
| | $ | (4.5 | ) | | $ | 26.3 |
| | $ | (72.5 | ) | | $ | 9.0 |
| | $ | 18.1 |
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | | | | | | | |
| Per Ton Information | 2013 | | 2012 | | Difference | | Percent change | | | | | | | | |
| Realized product revenue rate | $ | 114.45 |
| | $ | 112.93 |
| | $ | 1.52 |
| | 1.3 | % | | | | | | | | |
| Cash production cost | 91.68 |
| | 108.24 |
| | (16.56 | ) | | (15.3 | )% | | | | | | | | |
| Non-production cash cost | 13.98 |
| | 0.35 |
| | 13.63 |
| | n/m | | | | | | | | |
| Cost of goods sold and operating expenses rate (excluding DDA) | 105.66 |
| | 108.59 |
| | (2.93 | ) | | (2.7 | )% | | | | | | | | |
| Depreciation, depletion & amortization | 20.87 |
| | 17.93 |
| | 2.94 |
| | 16.4 | % | | | | | | | | |
| Total cost of goods sold and operating expenses rate | 126.53 |
| | 126.52 |
| | 0.01 |
| | — | % | | | | | | | | |
| Sales margin | $ | (12.08 | ) | | $ | (13.59 | ) | | $ | 1.51 |
| | n/m | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Bloom Lake sales tons | 5,665 |
| | 5,693 |
| | | | | | | | | | | | |
| Wabush sales tons | 2,886 |
| | 3,241 |
| | | | | | | | | | | | |
Sales tons 1 (In thousands) | 8,551 |
| | 8,934 |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Bloom Lake production tons | 5,877 |
| | 5,450 |
| | | | | | | | | | | | |
| Wabush production tons | 2,778 |
| | 3,065 |
| | | | | | | | | | | | |
Production tons 1 (In thousands) | 8,655 |
| | 8,515 |
| | | | | | | | | | | | |
1 Tons are metric tons (2,205 pounds). |
We reported a sales margin loss for our Eastern Canadian Iron Ore segment of $103.3 million for the year ended December 31, 2013, compared with a sales margin loss of $121.4 million for the year ended December 31, 2012. Sales margin per ton improved to a loss of $12.08 per ton for the year ended December 31, 2013 compared to a sales margin loss of $13.59 per ton for 2012.
Revenue decreased by $30.2 million for the year ended December 31, 2013 when compared to prior year, primarily due to:
Lower sales volumes of 383 thousand tons. The reduction in tons sold resulted in a decrease to revenue of $57.9 million, which was related primarily to the transition and idling of pellet production at Wabush as pellet sales decreased by 1.7 million tons period-over-period, offset partially by the sale of 1.4 million more metric tons of Wabush Scully mine sinter feed in 2013 compared with 2012,
Partially offset by the increase to the average revenue rate, which resulted in an increase of $27.7$68.8 million, driven by changes in spot market pricing offset by lower pellet premiums due to a shift in product mix, primarily asincluding the impact of foreign exchange. This increase is a result of:
| |
| ◦ | An increase toin the Platts 62 percent Fe spot rate to an average of $135 per metric ton from $130 per metric ton in the prior year resulted in an increase of $5 per metric ton; and |
| |
◦ | An increase due to favorable provisional pricing adjustments related to prior-year sales and higher premiums for iron content in comparison to the prior year, increasing the average revenue rate by $2 per metric ton and $1 per metric ton, respectively, |
| |
◦ | Offset by a change in product mix as our Eastern Canadian Iron Ore segment ceased pellet production at our Wabush facility in June 2013 and began producing only sinter feed until the Wabush facility was idled at the end of March 2014 and we began to implement the permanent closure plan for the minein the fourth quarter of 2014. During 2013, 17 percent of products sold were pellets, compared to 36 percent in the prior year, which resulted in62% Price positively affected the realized revenue rate decreasing by $4$3 per metric ton due to lower average pellet premiums;or $33 million; and |
| |
| ◦ | Further offset by timing impactsA favorable variance of a negative $2$3 per metric ton period over period, primarilyor $29 million due to approximately 300 thousand metric tonsthe suspension in 2015 of carryover pelletsthe hedging program that wereprotected against volatility in soldexchange rates. This did not occur in 2012 and based on 2011 contract pricing, which was substantially higher due to 2011 full-year market pricing.2016. |
Cost of goods sold and operating expenses duringdecreased $34.7 million or $2.98 per metric ton, in the year ended December 31, 2013 decreased2016 over the prior year, excluding the decrease of $2.9 million of freight and reimbursements, primarily as a result of:
Reduced administration and employment costs of $16 million or $1 per metric ton, due to lower headcount and contractor fees;
A reduction in mining costs of $12 million or $1 per metric ton, due to mining efficiencies gained from 2012 by $48.3 million primarily due to:our revised mine plan, including a reduction in the required mined tons to meet our desired yields;
Lower sales volumes at the Wabush and Bloom Lake facilities resulted in decreasedtransportation costs of $50.3$11 million or $1 per metric ton, due to decreased hauling volumes and $3.1 million, respectively, compared toreduced freight costs as a result of the prior year;
Incremental idle production costs at our Wabush operations of $26.3 million in 2012 that did not recur in 2013;revised mine plan; and
Favorable foreign exchange rate variances of $9.0$6 million or $1 per metric ton.
Partially offset by inventory write-downs primarilyincreased crushing costs due to increased maintenance activities and our use of a third-party mobile crushing until and increased royalties, which were driven by higher gross revenues, for $9 million or $1 per metric ton.
Production
Production volume at our Wabush facility of $68.0 million related to a supplies inventory write-down of $29.7 million, lower-of-cost-or-market charges of $19.8 million and unsaleable inventory impairment charges of $18.5 million recorded during 2013.
Production
The Bloom Lake facility produced 5.9 million and 5.4 million metric tons of iron ore concentrateAsia Pacific Iron Ore segment during the yearsyear ended December 31, 2013 and 2012, respectively. During2016 remained consistent with 2015, increasing 117 thousand metric tons or 1.0%. The increase in production tons compared to the first quarter of 2014, we announced that we were exploring various strategic alternatives for our Bloom Lake mine. We continuedprior year is mainly attributable to operate the Bloom Lake mine Phase I operations on a reduced tailings and water management capital plan throughout 2014increased crusher feed productivity and the Phase II expansion remained on hold. In the fourth quarteruse of 2014, all production at Bloom Lake mine was halted and the mine transitioned to "care-and-maintenance" status.third-party mobile crusher support.
Production at the Wabush facility was 2.8 million and 3.1 million metric tons during the years ended December 31, 2013 and 2012, respectively. Due to high production costs and lower pellet premium pricing, we idled production at our Pointe Noire iron ore pellet plant and transitioned to producing an iron ore concentrate product from our Wabush Scully mine during June 2013. At the end of March 2014, we idled our Wabush Scully mine in Newfoundland and Labrador and began to implement the permanent closure plan for the mine in the fourth quarter of 2014. The idle was driven by the unsustainable high cost structure, which resulted in operations that are not economically viable to run over time.
Liquidity, Cash Flows and Capital Resources
Our primary sources of liquidity areCash and cash equivalents and cash generated from our operating and financing activities. Our capital allocation decision-making process is focused on prioritizing all potential usesimproving the strength of future cash flows.our balance sheet and creating financial flexibility to manage through the inherent cyclical demand for our products and volatility in commodity prices. We continue to focusare focused on the preservation of liquidity in our business through maximizing the cash generation inof our business operations as well as reductionsreducing operating costs, aligning capital investments with our strategic priorities and the requirements of any discretionary expendituresour business plan, including regulatory and permission-to-operate related projects, and managing SG&A expenses.
During 2017, we took action consistent with our capital allocation priorities and our stated objective of improving the strength of our balance sheet, improving our financial flexibility and executing on opportunities that will allow us to increase our long-term profitability. Through the issuance of common shares in order to ensurean underwritten public offering resulting in net proceeds of $661.3 million and two debt offerings for an aggregate principal amount of $1.075 billion, we are positioned to face the challengesextinguished $1.611 billion of our existing debt, thereby reducing our average interest rate and uncertainties of the volatile pricing markets forextending our products.
Based on current mine plans and subject to future iron ore and coal prices and supply and demand,debt maturities. In concurrent debt offerings we expect our operating cash flows generated in 2015 to be sufficient to cover our budgeted capital expenditures and dividend requirements. Furthermore, we supplement this cash generation with adequate liquidity via financing arrangements to fund our normal business operations and strategic initiatives through our revolving credit agreement. During the fourth quarter of 2014, we generated positive cash flows from operations and were able to reduce our overall total debt less cash position by approximately $300 million, including the repurchase of $45sold $400.0 million aggregate principal amount of our senior notes. Additionally,secured notes and $316.25 million aggregate principal amount of convertible notes resulting in January 2015, we further reduced total debt by approximately $159 million through senior note repurchases in the open market with approximately $106 million of net proceeds fromof $697.5 million that we intend to use to fund a substantial portion of our HBI project in Toledo, Ohio, for upgrades at the saleNorthshore plant to enable it to produce significantly increased levels of CLCCDR-grade pellets that could be used as feedstock for the HBI production plant and/or sold commercially and cashgeneral corporate purposes.
from operations. Based on current market conditions,our outlook for the next 12 months, which is subject to continued changing demand from steelmakers that utilize our products and volatility in iron ore and domestic steel prices, we expect to be ablegenerate cash from operations sufficient to fundmeet the needs of our requirements for at least the next 12 months.
As a result of the Bloom Lake Group commencing restructuring proceedings under the CCAA, the initial order obtained on January 27, 2015 addressed the Bloom Lake Group’s immediate liquidity issues by staying creditor claimsexisting operations and permitting the Bloom Lake Group to preserve and protect its assets for the benefit of all stakeholders while restructuring and/or sale options are explored. Certain obligations, including certain equipment loans, were guaranteed by Cliffs and totaled approximately $145 million. Through this court monitored process, we anticipate the restructuring and/or sale of the Bloom Lake Group assets may mitigate the impact of these obligations to Cliffs' liquidity during 2015. Cash and cash equivalents of the Bloom Lake Group were $17.2 million at December 31, 2014.service our debt obligations.
Refer to “Outlook” for additional guidance regarding expected future results, including projections on pricing, sales volume and production for our various businesses.production.
The following discussion summarizes the significant activities impacting our cash flows during 20142017 and comparative years as well as those expected to impact our future cash flows over the next 12 months. Refer to the Statements of Consolidated Cash Flows for additional information.
Operating Activities
Net cash provided by operating activities decreasedwas $338.1 million and $303.0 million for the years ended December 31, 2017 and 2016, respectively. The increase in cash provided by operating activities during 2017 was primarily due to $358.9the improved operating results previously discussed related to our U.S. Iron Ore operating segment offset partially by cash outflows for working capital. The working capital change in 2017 versus 2016 was primarily driven by the repeal of corporate AMT as a result of tax reform, which impacted our taxes receivable, and the timing of inventory and accounts receivable movements.
Driving the increase in our taxes receivable is Public Law 115–97, commonly known as the “Tax Cuts and Jobs Act”, which among other things, repeals the corporate AMT and will reduce the federal corporate tax rate to 21% for tax years beginning January 1, 2018. Along with the repeal of AMT, Public Law 115–97 provides that existing AMT credit carryovers are refundable beginning with the filing of the calendar year 2018 tax return. We have $235.3 million of AMT credit carryovers that are expected to be fully refunded between 2019 and 2022.
Net cash provided by operating activities increased to $303.0 million for the year ended December 31, 2014,2016, compared to net cash provided by operating activities of $1,145.9$37.9 million for 2013.2015. The decreaseincrease in operating cash flows in 2014 were primarily due to lower operating results as previously discussed.
Net cash provided by operating activities improved to $1,145.9 million for the year ended December 31, 2013, compared to cash provided by operating activities of $514.5 million for 2012. The increase in operating cash flow in 20132016 was primarily due to the timing of paymentsbetter operating results previously discussed related to 2011 income taxes in early 2012, other changes inboth the U.S. Iron Ore and Asia Pacific Iron Ore operating segments, and improved cash flows from working capital. The working capital and reduced exploration and selling, general and administrative costs.
We expect economic growthimprovement in 2016 versus 2015 was driven by aggressively reducing inventory levels partially offset by the U.S. to continueprior-year income tax refund. Sales volume outpaced production volume in 2016, while in 2015, and correspondingly expect steel demand to remain at healthy levels. While the industry demand will be supported by an improving housing market and a strengthened automotive sector, demand from energy companies is expected to decrease as oil prices remain at depressed levels. Additionally, the steel industry should face continued pressure from surging imports, which reached record levels in 2014, as the strength of the U.S. dollar continues to increase and continued oversupply of the global steel industry. In China, demand for steel should increase slightly compared to 2014, although at a rate far below growth percentages recorded earlier in the decade. In 2014, the increase in seaborne supply of iron oreproduction volume was expected by many, but the slowdown in demand from Chinese end markets was unexpected and negatively impacted spot prices for iron ore. We expect seaborne iron ore prices to remain pressured unless there are vast structural changes to the supply/demand picture, including increased Chinese demand or iron ore capacity cuts.higher than sales volume.
Coupled with efficient tax structures, our U.S. operations and our financing arrangements provide sufficient capital resources; however, if we were to repatriate earnings, we would be subject to income tax. Our U.S. cash and cash equivalents balance at December 31, 20142017 was $136.1$952.1 million, or approximately 46.8 percent94% of our consolidated total cash and cash equivalents balance of $290.9$1,007.7 million. As of December 31, 2014 and 2013, we had no restrictions on our borrowing capacity of our U.S.-based revolving credit facility inclusive of the changes made through Amendment No. 6. Furthermore, historically we have been able to raise additional capital through private financings and public debt and equity offerings, the bulk of which, to date, have been U.S.-based. If the demand for our product weakens and/or pricing deteriorates for a prolonged period, we have the financial and operational flexibility to reduce production, delay capital expenditures, sell assets and reduce overhead costs to provide liquidity in the absence of cash flow from operations.
Investing Activities
Net cash used inby investing activities was $103.6$156.0 million for the year ended December 31, 2014,2017, compared with $811.3$57.9 million for 2013.the year ended December 31, 2016. We had capital expenditures of $284.1$151.7 million and $861.6$69.1 million for the years ended December 31, 20142017 and 2013,2016, respectively. The 2017 capital expenditures include sustaining capital spend, early-stage work on our HBI project and the acquisition of certain real estate interests located in Itasca County west of Nashwauk, Minnesota.
Net cash used in investing activities was $57.9 million for the year ended December 31, 2016 compared with $103.2 million for 2015. We had capital expenditures of $69.1 million and $80.8 million for the years ended December 31, 2016 and 2015, respectively. Offsetting our investments in property, plant and equipment, during 2014,2016, we had cash proceeds from investing activities of $155.0$8.3 million, primarily from the salecollection of CLCC.a debtor-in-possession credit facility (the "DIP financing").
Net cash used by investing activities was $811.3We spent approximately $48 million, for the year ended December 31, 2013, compared with $961.8 million for 2012. We had capital expenditures of $861.6$43 million and $1,127.5 million for the years ended December 31, 2013 and 2012, respectively. Our main capital investment focus had been on the construction of the Bloom Lake mine's operations. On the ramp-up and expansion projects at Bloom Lake mine, we spent approximately $426 million and approximately $475 million during the years ended December 31, 2013 and 2012, respectively. In addition, the expenditures for the Bloom Lake tailings and water management system totaled $191 million and $99 million in 2013 and 2012, respectively.
Up until the first quarter of 2014, our main capital investment focus was on the construction of the Bloom Lake mine's operations, at which time we placed the Phase II expansion on hold. We subsequently determined that the Phase II expansion of the Bloom Lake mine was no longer a viable option for us and we shifted our focus to considering available possibilities and executing an exit option for Eastern Canadian Iron Ore operations that minimizes the cash outflows and associated liabilities. In December 2014, iron ore production at the Bloom Lake mine was suspended and the Bloom Lake mine was placed in ‘‘care-and-maintenance’’ mode. Prior to Bloom Lake mine entering "care and maintenance" mode, on the expansion projects at the Bloom Lake mine, we spent approximately $51 million and approximately $426 million during the years ended December 31, 2014 and 2013, respectively, which predominately relates to work performed in 2013. In addition, the expenditures for the Bloom Lake tailings and water management system totaled $92 million and $191 million in 2014 and 2013, respectively. Additionally, we spent approximately $140 million and $203$81 million globally on expenditures related to sustaining capital excluding the Bloom Lake tailingsduring 2017, 2016 and water management in 2014 and 2013,2015, respectively. Sustaining capital spend includes infrastructure, mobile equipment, environmental, safety, fixed equipment, product quality and health. Additionally, during the year ended December 31, 2017, we spent approximately $43 million on our capital project to produce a specialized, super-flux pellet called "Mustang" at United Taconite in order to meet a customer's pellet specification requirements. We have spent a total of approximately $74 million on this project and expect remaining payments of less than $1 million.
In alignment with our strategy to focus on allocatingprioritize our capital among key priorities related toallocation between liquidity management and business investment, we anticipate total cash used for capital expenditures, in 2015excluding amounts attributable to construction-related contingencies and capitalized interest, during 2018 to be approximately $125$385 million, the vast majority of which relates to $150 million.our U.S. operations. Included within this estimate is approximately $250 million related to development of the HBI production plant in Toledo, Ohio and $50 million for upgrades at the Northshore plant to enable it to produce significantly increased levels of DR-grade pellets that could be sold commercially or used as feedstock for the HBI production plant. In total, we expect to spend approximately $700 million on the HBI production plant and $80 million on the Northshore upgrades, exclusive of construction-related contingencies and capitalized interest, through 2020.
Financing Activities
Net cash usedprovided by financing activities was $288.3$498.9 millionfor the year ended December 31, 2014,2017, compared with $171.9 million for 2013. Net cash used includes dividend distributions of $143.7 million and $127.6 million for the years ended December 31, 2014 and 2013, respectively. Additionally,net cash used by financing activities during 2014 included $28.8of $206.4 million for the repurchase2016. Sources of senior notes and $20.9 million for the repayment of equipment loans. In 2013, we had net repayments under our credit facilities of $325.0 million, which was partially offset by cash provided byfrom financing activities of $164.8 million from equipment loans. Additionally, we completed public offerings of 29.25 million depositary shares and 10.35 millionduring 2017 included a common shares, resulting inshare offering, generating net proceeds of $709.4$661.3 million, and $285.3the issuance of $1.075 billion 5.75% 2025 Senior Notes, which provided further net proceeds of $1.046 billion. We also had an issuance of $400.0 million respectively, after underwriting fees4.875% 2024 Senior Secured Notes and discountsan issuance of which a portion$316.25 million 1.5% 2025 Convertible Senior Notes, generating net proceeds of $697.5 million.
Uses of cash from financing activities during 2017 included the redemption of various tranches of secured and unsecured debt. We redeemed in full all of our outstanding $540 million 8.25% 2020 First Lien Notes, $218.5 million 8.00% 2020 1.5 Lien Notes and $544.2 million 7.75% 2020 Second Lien Notes and purchased certain other outstanding senior notes through tender offers and redemptions. The total aggregate principal amount of debt redeemed and purchased, including premiums, during 2017 was $1.721 billion.
Additionally, we finalized an agreement to distribute the net assets of the net proceeds were usednoncontrolling interest in Empire to repay
ArcelorMittal in exchange for its interest in Empire and made the $847.1first distribution of $44.2 million. The remaining annual installments of $44.2 million outstanding undereach are due in August 2018 and August 2019. We also acquired the term loan.remaining 15% equity interest in Tilden owned by U.S. Steel for $105.0 million.
Net cash used by financing activities during 2013 was $171.9$206.4 million for the year ended December 31, 2016, compared towith net cash provided by financing activities of $119.6$61.0 million for 2012. Cash flows provided2015. Net cash used by financing activities during 2012 included $497.0the redemption of all of our outstanding 3.95% 2018 Senior Notes for $305.4 million, inwhich was offset partially by net proceeds from the issuance of common shares of $287.4 million. Additionally, we paid the $500.0 million 3.95 percent senior notes, completed through a public offeringremaining balance of certain of our equipment loans, which resulted in December 2012. A portioncash outflows of the net proceeds from the senior notes offering was used on December 28, 2012 to repay the $270.0 million and $55.0 million aggregate principal amount of outstanding private placement senior notes and also for the repayment of a portion of the borrowings outstanding under the term loan facility and the revolving credit facility. In addition,$95.6 million. Further, we had net borrowings and repayments under the revolving credit facility of $325.0 million and cash calls from our joint venture partners resulted in net cash receipts of $95.4 million.Offsetting the proceeds from financing activities in 2012 were dividendoutflows attributable to agreed-upon early distributions of $307.2partnership equity of $59.9 million and $124.8 million for term loan repayments.
On September 10, 2014, we announced that our Board of Directors approved a buy back of outstanding common shares induring the open market or in private negotiated transactions up to a maximum of $200 million dollars. We are not obligated to make any purchases, and the repurchase program may be suspended or discontinued at any time. The authorization is active untilyear ended December 31, 2015.
On2016 and paid the last such scheduled early distribution of partnership equity of $8.7 million in January 26, 2015, we announced that our Board of Directors had decided to eliminate the quarterly dividend of $0.15 per share on our common shares. The decision is applicable to the first quarter of 2015 and all subsequent quarters. The elimination of the common share dividend provides us with additional free cash of approximately $92 million annually, which we intend to use for further debt reduction, including the repurchase of senior notes at a discount. We see accelerated debt reduction as a more effective means of protecting our shareholders than continuing to pay a common share dividend.2017.
The following represents our future cash commitments and contractual obligations as of December 31, 2014:2017:
| | | | | Payments Due by Period 1 (In Millions) | | | | | | | | | | | | | | | | |
| | | | | Less than | | 1 - 3 | | 3 - 5 | | More Than | | Payments Due by Period (In Millions) |
| Contractual Obligations | | Total | | 1 Year | | Year | | Year | | 5 Years | | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More than 5 Years |
| Long-term debt | | $ | 2,995.8 |
| | $ | 21.8 |
| | $ | 46.3 |
| | $ | 530.1 |
| | $ | 2,397.6 |
| | $ | 2,439.4 |
| | $ | — |
| | $ | 211.3 |
| | $ | 138.4 |
| | $ | 2,089.7 |
|
Interest on debt 2 | | 1,901.0 |
| | 163.0 |
| | 323.4 |
| | 278.6 |
| | 1,136.0 |
| |
Interest on debt1 | | | 1,098.9 |
| | 123.4 |
| | 242.5 |
| | 212.8 |
| | 520.2 |
|
| Operating lease obligations | | 51.2 |
| | 12.0 |
| | 17.7 |
| | 11.6 |
| | 9.9 |
| | 19.6 |
| | 4.9 |
| | 3.6 |
| | 3.6 |
| | 7.5 |
|
| Capital lease obligations | | 198.6 |
| | 84.8 |
| | 61.0 |
| | 31.8 |
| | 21.0 |
| | 56.6 |
| | 20.8 |
| | 23.2 |
| | 12.6 |
| | — |
|
| Contingent claims | | | 55.6 |
| | 55.6 |
| | — |
| | — |
| | — |
|
| Partnership distribution payable | | | 88.4 |
| | 44.2 |
| | 44.2 |
| | — |
| | — |
|
| Purchase obligations: | | | | | | | | | | | | | | | | | | | | |
| Open purchase orders | | 174.3 |
| | 144.9 |
| | 29.4 |
| | — |
| | — |
| | 71.6 |
| | 64.0 |
| | 7.5 |
| | 0.1 |
| | — |
|
| Minimum royalty payments | | 34.7 |
| | 2.8 |
| | 5.7 |
| | 15.3 |
| | 10.9 |
| |
Minimum "take or pay" purchase commitments 3 | | 1,229.8 |
| | 382.7 |
| | 624.8 |
| | 148.6 |
| | 73.7 |
| |
Minimum "take or pay" purchase commitments2 | | | 472.4 |
| | 86.0 |
| | 181.2 |
| | 69.1 |
| | 136.1 |
|
| Total purchase obligations | | 1,438.8 |
| | 530.4 |
| | 659.9 |
| | 163.9 |
| | 84.6 |
| | 544.0 |
| | 150.0 |
| | 188.7 |
| | 69.2 |
| | 136.1 |
|
| Other long-term liabilities: | | | | | | | | | | | | | | | | | | | | |
| Pension funding minimums | | 216.7 |
| | 42.5 |
| | 34.2 |
| | 73.8 |
| | 66.2 |
| | 280.1 |
| | 27.7 |
| | 56.7 |
| | 57.2 |
| | 138.5 |
|
| OPEB claim payments | | 461.7 |
| | 6.8 |
| | 13.6 |
| | 14.4 |
| | 426.9 |
| | 105.4 |
| | 4.0 |
| | 7.6 |
| | 7.3 |
| | 86.5 |
|
| Environmental and mine closure obligations | | 261.2 |
| | 5.2 |
| | 7.9 |
| | 55.3 |
| | 192.8 |
| | 200.1 |
| | 3.6 |
| | 33.8 |
| | 4.8 |
| | 157.9 |
|
| Personal injury | | 12.0 |
| | 4.0 |
| | 4.9 |
| | 0.4 |
| | 2.7 |
| |
| Total other long-term liabilities | | 951.6 |
| | 58.5 |
| | 60.6 |
| | 143.9 |
| | 688.6 |
| | 585.6 |
| | 35.3 |
| | 98.1 |
| | 69.3 |
| | 382.9 |
|
| Total | | $ | 7,537.0 |
| | $ | 870.5 |
| | $ | 1,168.9 |
| | $ | 1,159.9 |
| | $ | 4,337.7 |
| | $ | 4,888.1 |
|
| $ | 434.2 |
|
| $ | 811.6 |
|
| $ | 505.9 |
|
| $ | 3,136.4 |
|
| | | | | | | | | | | | | | | | | | | | | |
1 Includes our consolidated obligations. | |
2 For the $500 million senior notes, interest is calculated using a fixed rate of 3.95 percent from 2015 to maturity in January 2018. For the $400 million senior notes, interest is calculated using a fixed rate of 5.90 percent from 2015 to maturity in March 2020. For the $1.3 billion senior notes, interest is calculated for the $500 million 10-year notes using a fixed rate of 4.80 percent from 2015 to maturity in October 2020, and the $800 million 30-year notes using a fixed rate of 6.25 percent from 2015 to maturity in October 2040. For the $700 million senior notes, interest is calculated using a fixed rate of 4.875 percent from 2015 to maturity in April 2021. For the $140.8 million of equipment loans, interest is calculated using the fixed rate associated with each of the equipment loans from 2015 to maturity in 2020. | |
3 Includes minimum railroad transportation obligations, minimum electric power demand charges, minimum coal, diesel and natural gas obligations and minimum port facility obligations. | |
1 Refer to NOTE 5 - DEBT AND CREDIT FACILITIES for additional information regarding our debt and related interest rates. | | 1 Refer to NOTE 5 - DEBT AND CREDIT FACILITIES for additional information regarding our debt and related interest rates. |
2 Includes minimum railroad transportation obligations, minimum electric power demand charges, minimum coal, diesel and natural gas obligations and minimum port facility obligations. | | 2 Includes minimum railroad transportation obligations, minimum electric power demand charges, minimum coal, diesel and natural gas obligations and minimum port facility obligations. |
The above table does not reflect $74.7$6.1 million of unrecognized tax benefits, which we have recorded for uncertain tax positions, as we are unable to determine a reasonable and reliable estimate of the timing of future payments. Included in the above table are the cash commitments and contractual obligations associated with the Bloom Lake Group that have been included in the CCAA filing, most of which we believe will be treated as unsecured claims. Because of the uncertainty of the CCAA process, we are unable to determine a reasonable and reliable estimate of amounts and timing of future payments related to the obligations of the Bloom Lake Group.
Refer to NOTE 20 - COMMITMENTS AND CONTINGENCIES of the Consolidated Financial Statements for additional information regarding our future commitments and obligations.
Capital Resources
We expect to fund our business obligations from available cash, current and future operations and existing borrowing arrangements. We also may pursue other funding strategies in the capital markets to strengthen our liquidity. The following represents a summary of key liquidity measures as of December 31, 20142017 and December 31, 2013:2016:
|
| | | | | | | |
| | (In Millions) |
| | December 31,
2014 | | December 31, 2013 |
| Cash and cash equivalents | $ | 290.9 |
| | $ | 335.5 |
|
| Available revolving credit facility | $ | 1,125.0 |
| | $ | 1,750.0 |
|
| Revolving loans drawn | — |
| | — |
|
| Senior notes | 2,855.0 |
| | 2,900.0 |
|
| Senior notes drawn | (2,855.0 | ) | | (2,900.0 | ) |
| Letter of credit obligations and other commitments | (149.5 | ) | | (8.4 | ) |
| Borrowing capacity available | $ | 975.5 |
| | $ | 1,741.6 |
|
|
| | | | | | | |
| | (In Millions) |
| | December 31,
2017 | | December 31, 2016 |
| Cash and cash equivalents | $ | 1,007.7 |
| | $ | 323.4 |
|
| | | | |
Available borrowing base on ABL Facility1 | $ | 273.2 |
| | $ | 333.0 |
|
| ABL Facility loans drawn | — |
| | — |
|
| Letter of credit obligations and other commitments | (46.5 | ) | | (106.0 | ) |
| Borrowing capacity available | $ | 226.7 |
| | $ | 227.0 |
|
| | | | |
1 The ABL Facility has the maximum borrowing base of $550 million, determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment. |
Our primary sourcesources of funding is our revolving credit facility, which matures on October 16, 2017. We also haveare cash on hand, generated by the business,and cash equivalents, which totaled $290.9$1,007.7 million as of December 31, 2014.2017, cash generated by our business, availability under the ABL Facility and other financing activities. Cash and cash equivalents include cash on hand and on deposit as well as all short-term securities held for the primary purpose of general liquidity. The combination of cash and availability under the credit facility gaveABL Facility gives us approximately $1.3 billion$1,234.4 million in liquidity entering the first quarter of 2015,2018, which is expected to be usedadequate to fund operations, letter of credit obligations, sustaining and expansion capital expenditures. As noted below, however, the availability under our revolving credit agreement was reduced to $900 million in January 2015 and will be reduced to $750 million on May 31, 2015.
On January 22, 2015, we amended the revolving credit agreement (Amendment No. 6) to effect the following:
Reduces the size of the existing facility from $1.125 billion to $900 million at the closing of this amendment with a further reduction to $750 million on May 31, 2015.
Permits certain of our subsidiaries and joint ventures related to our Canadian operations (collectively, the "Canadian Entities") to enter into a restructuring (the "Canadian Restructuring").
Permits costs and expenses incurred in connection with the Canadian Restructuring in an amount not to exceed $75 million to be added back to the calculation of EBITDA.
Adds limitations with respect to investments in the Canadian Entities after the Canadian Restructuring.
Adds limitations on the guaranty of indebtness of a Canadian Entity by us or our subsidiaries (other than by another Canadian Entity).
Permits additional liens on the assets of the Canadian Entities.
Reduces the permitted amount of quarterly dividends on our common shares to not more than $0.01 per share in any fiscal quarter.
Grants a security interest in our as-extracted collateral and certain of our subsidiaries.
Excludes certain indebtness and obligations of the Canadian Entities from the representations, covenants and events of default.
The amended facility retains substantial financial flexibility for management to execute our strategy and provides us a consistent source of liquidity.
On October 24, 2014, we amended the revolving credit agreement (Amendment No 5.) to effect the following:
Reduces the size of the existing facility from $1.250 billion to $1.125 billion.
Grants a valid and perfected first-priority (subject to certain permitted liens) security interest in certain property and assets of the Company and certain of its subsidiaries, subject to customary exclusions all specified in a security agreement.
With effect as of September 30, 2014, removes the maximum balance sheet leverage ratio of debt to capitalization of less than 45 percent, which was a covenant introduced in June 2014, and replaces that covenant with a maximum leverage ratio covenant of secured debt to EBITDA that is not to exceed 3.5 times.
Retains the minimum interest coverage ratio requirement of 3.5 times, and was subsequently reduced to 2.0 times upon completion of certain collateral actions within 60 days of the execution of the amendment. The collateral requirements were satisfied as of December 23, 2014.
Subjects restricted payments (including the $200 million share repurchase, which was approved in September 2014) and current dividend structure to a $400 million liquidity test.
Adds limitations regarding acquisitions, investments (including investments in non-wholly owned subsidiaries and joint ventures) and subsidiary debt.
Eliminates the accounts receivable securitization facility.
Terminates the ability to have foreign borrowers under the revolving credit agreement.
The amended facility retains substantial financial flexibility for management to execute our strategy and provides us a consistent source of liquidity.
On September 9, 2014, we amended the revolving credit agreement (Amendment No. 4) to effect the following:
Permitting a one-time exemption of up to $200 million in share repurchases (consummated in a single transaction or series of related transactions), effective until December 31, 2015. We are not obligated to make any purchases and the program may be suspended or discontinued at any time.
Reducing the size of the existing unsecured facility from $1.75 billion to $1.25 billion.
Adding restrictions on the granting of certain pledges and guarantees.
Adding an obligation to enter into a security agreement, on or before June 30, 2015, to grant security interests to secure obligations under the revolving credit agreement on U.S. receivables and inventory, other than receivables and related property subject to certain existing receivable securitization or other facilities, a pledge of 65 percent of the stock of all material, wholly-owned first-tier foreign subsidiaries and a pledge of all of the stock of all material U.S. subsidiaries, in each case, subject to certain limitations.
All terms of Amendment No. 3 as of June 30, 2014, as discussed below, remained in place and were not changed by Amendment No. 4 as of September 9, 2014.
On June 30, 2014, we amended the revolving credit agreement (Amendment No. 3) to effect the following:
Replacing the current maximum leverage covenant ratio of debt to earnings of less than 3.5 times with a maximum balance sheet leverage ratio of debt to capitalization of less than 45 percent.
Resetting the minimum interest coverage ratio from 2.5 to 1.0 to the ratio of 3.5 to 1.0.
Amending the definition of EBITDA to include certain cash charges related to the Company’s Wabush mineexpenditures and other cash restructuring charges andcommitments for at least the definition of net worth to exclude up to $1 billion in non-cash impairment charges.
Modifying the covenants restricting certain investments and acquisitions, the incurrence of certain indebtedness and liens, and the amount of dividends that may be declared or paid and shares that may be repurchased.next 12 months.
As of December 31, 2014 and 2013,2017, we were in compliance with all applicablethe ABL Facility liquidity requirements and, therefore, the springing financial covenants relatedcovenant requiring a minimum Fixed Charge Coverage Ratio of 1.0 to the revolving credit agreement.
Although we1.0 was not applicable. We believe that the revolving credit agreement providescash on hand and the ABL Facility provide us sufficient liquidity to support our operating, investing and investing activities, we continuefinancing activities. We have the capability to refine our capital structure to achieve an optimal mixissue additional unsecured notes and, level of debt, equity and other prudent financing arrangements. Several credit markets may provide additional capacity should that become necessary. The bank market may provide funding through a secured credit facility, term loan or bridge loan. Additionally, we have accesssubject to the bond market as a sourcelimitations set forth in our existing debt indentures, additional secured indebtedness, if we elect to access the debt capital markets. However, available capacity of capital. The risk associated with these credit markets is a significant increase in borrowing costs as a result ofnotes could be limited capacity andby market conditions.
As we have previously disclosed, we have contemplated replacingConsistent with our revolving credit facility with a secured asset-based revolving credit facility, andstated strategy, we are currently in discussions with lenders about putting such a facility in place. We cannot guarantee that we will be successful in obtaining an asset-based revolving credit facility on commercially acceptable terms or at all.
We intend from time to time to seek to retire or purchase our outstanding senior notes with cash on hand, borrowings from existing credit sources or new debt financings and/or exchanges for debt or equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements.arrangements that are not reflected on our Statements of Consolidated Financial Position. These arrangements include minimum "take or pay" purchase commitments, such as minimum electric power demand charges, minimum coal, diesel and natural gas purchase commitments, minimum railroad transportation commitments and minimum port facility usage commitments; financial instruments with off-balance sheet risk, such as bank letters of credit and bank guarantees; and operating leases, which primarily relate to equipment and office space. Liabilities related to these arrangements are not reflected on our Statements of Consolidated Financial Position. However, the underlying obligations that they secure, such as asset retirement obligations, self-insured workers' compensation liabilities, royalty obligations and certain post-retirement benefit obligations, are reflected in our Statements of Consolidated Financial Position.
We may be required to provide financial assurance in order to perform the post-mining reclamation required by our mining permits, pay our production royalties, pay workers' compensation claims under self-insured workers' compensation laws in various states, pay retiree benefits and perform certain other obligations. In order to provide the required financial assurance, we generally use surety bonds and/or letters of credit, and, effective with Amendment No. 5 to the revolving credit agreement, letters of credit are primarily issued under our revolving credit facility. Previously we had an unsecured, uncommitted letter of credit line with Scotiabank. With the recent credit rating downgrades, we experienced an increase in requests for financial assurance to be provided. Additionally, with the Bloom Lake Group CCAA filing, approximately $15 million of surety bonds and letters of credit backing obligations have been called and settled in cash in early 2015.
Market Risks
We are subject to a variety of risks, including those caused by changes in commodity prices, foreign currency exchange rates and interest rates. We have established policies and procedures to manage such risks; however, certain risks are beyond our control.
Pricing Risks
Commodity Price Risk
Our consolidated revenues include the sale of iron ore pellets, iron ore concentrate,lump and iron ore lump and fines, low-volatile metallurgical coal, high-volatile metallurgical coal and thermal coal. However, during the fourth quarter of 2014, we sold our high-volatile metallurgical coal and thermal coal mines in the sale of the CLCC assets. The sale of the CLCC assets closed on December 31, 2014, and therefore beyond 2014, we will no longer have revenues associated with high-volatile metallurgical coal and thermal coal.fines. Our financial results can vary significantly as a result of fluctuations in the market prices of iron ore and coal.hot-rolled coil steel. World market prices for these commodities have fluctuated historically and are affected by numerous factors beyond our control.
The world market price that most commonly is utilized in our iron ore sales contracts is the Platts 62 percent Fe fines spot rate pricing,62% Price, which can fluctuate widely due to numerous factors, such as global economic growth or contraction, change in demand for steel or changes in availability of supply. The other important metric in our price realizations in the U.S. is the prices for hot-rolled coil steel, which can fluctuate due to similar factors.
Provisional Pricing Arrangements
Certain of our U.S. Iron Ore and Asia Pacific Iron Ore and Eastern Canadian Iron Ore customer supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference between the provisionally agreed-upon price and the estimated final revenue rate is characterized as a derivative and is required to be accounted for separately once the revenue has been recognized. The derivative instrument is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rate is determined.
At December 31, 2014,2017, we have recorded $11.8had derivative assets and liabilities of $1.5 million and $2.4 million, respectively, reflected as derivative liabilities included in Other current liabilities in the Statementspart of Consolidated Financial Position related to our estimate of final sales rate with our U.S. Iron Ore and Asia Pacific Iron Ore and Eastern Canadian Iron Ore customers. These amounts representsegment revenue, representing the difference betweenfair value of the provisional price agreed upon with our customers based oncalculations. We estimate that a positive or negative $10 change in the supply agreement terms and our estimatePlatts 62% Price from the December 31, 2017 estimated price recorded would cause a corresponding increase or decrease in the fair value of the final sales rate based onderivative instrument of approximately $5 million and $4 million for our U.S. Iron Ore and Asia Pacific Iron Ore segments, respectively.
We have not entered into any hedging programs to mitigate the risk of adverse price calculations establishedfluctuations; however, most of our Asia Pacific Iron Ore supply agreements are short-term in the supply agreements. As a result, we recognized a net $11.8 million decrease, respectively, in Product revenues in the Statements of Consolidated Operations for the year ended December 31, 2014 relatednature and therefore do not expose us to these arrangements.long-term risk.
Customer Supply Agreements
Certain supply agreements with one U.S. Iron Ore customer provide for supplemental revenue or refunds based on the customer’s average annual daily market price for hot-rolled coil steel pricing at the time the product is consumed in the customer’s blast furnace. Thefurnaces. In the new contract which commenced in 2017, this supplemental pricing is characterized as a freestanding derivative, which is finalized based on a futurerevenue and refund data source changes from the customer's average annual steel price and is adjusted to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. The fair value of the instrument is determined using an income approach based on an estimate of theaverage annual realizeddaily market price offor hot-rolled steel at the steelmaker’s facilities.
coil steel. At December 31, 2014,2017, we had a derivative assetassets of $63.2$37.9 million, representing the fair value of the pricing factors, based upon the amount of unconsumed long tons and an estimated average hot-bandhot-rolled coil steel price related to the period in which the tons areiron ore is expected to be consumed in the customer’s blast furnace at each respective steelmaking facility,furnaces, subject to final pricing at a future date. This compares with a derivative asset of $55.8 million as of December 31, 2013. As an example, weWe estimate that a $75 positive or negative change in the average hot-banddaily market price for hot-rolled coil steel price realized from the December 31, 20142017 estimated price recorded would cause the fair value of the derivative instrument to increase or decrease by approximately $8.8$15 million, respectively, thereby impacting our consolidated revenues by the same amount.
We have not entered into any hedging programs to mitigate the risk of adverse price fluctuations; however, certain of our term supply agreements contained price collars, which typically limit the percentage increase or decrease in prices for our products during any given year.fluctuations.
Volatile Energy and Fuel Costs
The volatile cost of energy is an important issuefactor affecting ourthe production costs primarily in relation toat our iron ore operations. Our consolidated U.S. Iron Ore mining venturesoperations consumed approximately 20.417.3 million MMBtu’s of natural gas at an average delivered price of $6.31$3.75 per MMBtu, and 29.3excluding the natural gas hedge impact, or $3.80 per MMBtu net of the natural gas hedge impact during 2017. Additionally, our consolidated U.S. Iron Ore operations consumed 22.3 million gallons of diesel fuel at an average delivered price of $3.11$1.87 per gallon, excluding the diesel fuel hedge impact, or $1.88 per gallon net of the diesel fuel hedge impact during 2014.2017. Consumption of diesel fuel by our Asia Pacific operations was approximately 14.711.2 million gallons at an average delivered price of $3.19$1.73 per gallon for the same period. Our consolidated Eastern Canadian Iron Ore mining ventures consumed approximately 7.6 million gallons of diesel fuel at an average delivered price of $4.03 per gallon during 2014. We would not anticipate significant consumption of fuel at our consolidated Eastern Canadian Iron Ore facilities during 2015 as a result our of strategy to execute an exit option for Eastern Canadian Iron Ore operations during 2015. Our CLCC operations consumed approximately 3.4 million gallons of diesel fuel at an average delivered price of $3.49 per gallon during 2014. Our CLCC assets were sold in fourth quarter of 2014 with the sale closing on December 31, 2014.
In the ordinary course of business, there may also will be likely increases in prices relative to electricalelectricity costs at our U.S. mine sites. Specifically, our Tilden and Empire minesmine in Michigan have madehas entered into large curtailable special contracts with Wisconsin Electric Power Company. Charges under those special contracts are subject to a power supply cost recovery mechanism that is based on variations in the decision to return to regulated utility service with WE Energies effective February 1, 2015, which we estimate will result in an increase of approximately $5 per MWh over our average 2014 rates. As the cost of producing electricity increases, the utility companies regularly seek to reclaim those costs from the mine sites, which often results in tariff disputes.utility's actual fuel and purchase power expenses.
Our strategy to address increasing energyvolatile natural gas and diesel rates includes improving efficiency in energy usage, identifying alternative providers and utilizing the lowest cost alternative fuels. A pilot energyfull-year hedging program has beenwas implemented during the fourth quarter of 2017 in order to manage the price risk of diesel and natural gas at our U.S. Iron Ore mines. This pilot program only affects the period of January through April of 2015. Based on the results of this pilot program, a more structured hedging program may be implemented in the future. We will continue to monitor relevant energy markets for risk mitigation opportunities and may make additional forward purchases or employ other hedging instruments in the future as warranted and deemed appropriate by management. Assuming we do not enter into further hedging activity inIn the near term, a 10 percent10% change in electrical,from our current average year-to-date natural gas and diesel fuel prices would result in a change of approximately $39.5$11 million in our annual fuel and energy cost based on expected consumption for 2015.2018.
Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that would indicate that the carrying value of the assets may not be recoverable. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in market pricing; a significant adverse
change in legal or environmental factors or in the business climate; changes in estimates of our recoverable reserves; unanticipated competition; and slower growth or production rates. Any adverse change in these factors could have a significant impact on the recoverability of our long-lived assets and could have a material impact on our consolidated statements of operations and statement of financial position.
A comparison of each asset group's carrying value to the estimated undiscounted future cash flows expected to result from the use of the assets, including cost of disposition, is used to determine if an asset is recoverable. Projected future cash flows reflect management's best estimates of economic and market conditions over the projected period, including growth rates in revenues and costs, estimates of future expected changes in operating margins and capital expenditures. If the carrying value of the asset group is higher than its undiscounted future cash flows, the asset group is measured at fair value and the difference is recorded as a reduction to the long-lived assets. We estimate fair value using a market approach, an income approach or a cost approach. As of December 31, 2017, there were no indicators present indicative of potential impairment or the inability to recover the value of our long-lived assets at our U.S. Iron Ore operations. As of December 31, 2017, there were certain indicators present indicative of potential impairment or the inability to recover the value of our long-lived assets at our Asia Pacific Iron Ore operations; however, the carrying value of our long-lived assets are at or below the liquidation fair value.
Foreign Currency Exchange Rate Risk
We are subject to changes in foreign currency exchange rates primarily as a result of our operations in Australia, and Canada, which could impact our financial condition. With respect to Australia, foreign exchange currency risk arises from our exposure to fluctuations in foreign currency exchange rates because our reporting currency is the U.S. dollar, but the functional currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore sales and incur costs in Australian currency. For our Canadian operations,We estimate that if the functional currency isaverage Australian dollar to U.S. dollar exchange rate during the U.S. dollar; however, most costs for these operations primarily are incurred inyear ended December 31, 2018 was $0.05 higher or lower than the Canadian dollar. The primary objectiveaverage exchange rate for the use of foreign exchange rate contracts is to reduce exposure to changes in Australian and U.S. currency exchange rates and Canadian and U.S. currency exchange rates, respectively, and to protect against undue adverse movement in these exchange rates.
Atyear ended December 31, 2014, we had outstanding Australian foreign currency exchange rate contracts with notional amounts of $220.0 million with varying maturity dates ranging from January 2015 to October 2015 for which we elected hedge accounting. To evaluate the effectiveness of2017, our hedges, we conduct sensitivity analysis. A 10 percent increase in the value of the Australian dollar from the month-end rate would increase the fair value of these contracts to approximately negative $1.6 million, and a 10 percent decrease would reduce the fair value to approximately negative $41.3 million. At December 31, 2014, we had no outstanding Canadian foreign currency exchange rate contracts for which we elected hedge accounting. In the fourth quarter of 2014, all outstanding Canadian foreign exchange rate contracts were de-designated and hedge accounting was discontinued. As a result of discontinued hedge accounting, the instruments are marked to fair value each reporting period through Costforecasted cash cost of goods sold and operating expenses onexpense would increase or decrease by approximately $26 million, respectively, for our Asia Pacific Iron Ore segment.
We have not entered into any hedging programs to mitigate the Statementsrisk of Consolidated Operations.adverse currency fluctuations. We do not intend to enterhave suspended entering into Canadiannew foreign exchange rate hedging contracts going forward. Refer to NOTE 13 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further discussion ofas we have indefinitely deferred the de-designation of the Canadian foreign currency exchange contracts.program. In the future, we may enter into additional hedging instruments as needed in order to further hedge our exposure to changes in foreign currency exchange rates.
The following table represents our foreign currency exchange contract position for contracts held as cash flow hedges as of December 31, 2014:
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| | | | | | | | | | | | | |
| | ($ in Millions) |
| Contract Maturity | Notional Amount | | Weighted Average Exchange Rate | | Spot Rate | | Fair Value |
Contract Portfolio 1 : | | | | | | | |
| AUD Contracts expiring in the next 12 months | $ | 220.0 |
| | 0.90 |
| | 0.8175 |
| | $ | (21.6 | ) |
1 Includes collar options and forward contracts. |
Refer to NOTE 13 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
Interest Rate Risk
Interest payable on our senior notes is at fixed rates. Interest payable under our revolving credit facilityABL Facility is at a variable rate based upon the base rate orplus the LIBORbase rate plus a margin depending on a leverage ratio.the excess availability. As of December 31, 2014,2017, we had no amounts drawn on the revolving credit facility.ABL Facility.
The interest rate payable onDuring 2017, we issued the $500 million 3.95 percent senior notes due 2018 may be subject to adjustments5.75% 2025 Senior Notes in private transactions exempt from time to time if either Moody's or S&P or, in either case, any substitute rating agency thereof downgrades (or subsequently upgrades) the debt rating assignedregistration requirements of the Securities Act. Pursuant to the notes.registration rights agreement executed as part of the issuances, we agreed to file a registration statement with the SEC with respect to a registered offer to exchange the 5.75% 2025 Senior Notes for publicly registered notes within 365 days of the issue date. If we fail to satisfy our obligations under the registration rights agreement, we will be required to pay additional interest to the holders of the 5.75% 2025 Senior Notes under certain circumstances. In nothe event shall (1)of a registration default, the interest rate forwill be increased by 0.25% per annum during the notes be reduced90-day period immediately following the occurrence of any registration default, and such rate shall increase by 0.25% per annum at the end of each subsequent 90-day period until all registration defaults have been cured, up to below thea maximum additional interest rate payable on the notes on the date of the initial issuance of notes or (2) the total increase in the interest rate on the notes exceed 2.00 percent above the interest rate payable on the notes on the date of the initial issuance of notes. The interest rate payable on the $500 million 3.95 percent senior notes was increased to 5.95 percent based on continued Substitute Rating Agency downgrades in January 2015. The maximum rate increase of 2.00 percent for the interest rate payable on the notes will result in an additional interest expense of $10.0 million1.00% per annum.
Supply Concentration Risks
Many of our mines are dependent on one source each of electric power and natural gas. A significant interruption or change in service or rates from our energy suppliers could impact materially our production costs, margins and profitability.
Outlook
BeginningSegment Outlook
After evaluating current and anticipated future market conditions in 2015,connection with the remaining iron ore reserves at Asia Pacific Iron Ore, including quality and the current market price for the ore, we have decided to accelerate the projected time frame for the planned closure of mining operations in order to provideAustralia, which will more financial transparency to our stakeholders,than likely occur in 2018. Accordingly, we will be providing full-year expected revenues-per-ton ranges based on different assumptions of seaborne iron ore prices. We indicated that each different pricing assumption holds all other assumptions constant, including customer mix, as well as industrial commodity prices, freight rates, energy prices, production input costs and/or hot-band steel prices (all factors contained in certain of our supply agreements).no longer provide guidance related to this business segment.
We previously furnished 2015 pricing expectations in a Current Report on Form 8-K filed on November 19, 2014. Due to the significant decline in both hot-band steel and energy prices, we have since lowered our assumptions with respect to these contract inputs. Below are the updated 2015 pricing expectations in a Current Report on Form 8-K filed on February 3, 2015.
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| | | | | |
2015 Full-Year Realized Revenues-Per-Ton Range | | 2018 Outlook Summary |
Platts IODEX (1) | Per Long Ton Information | U.S. Iron Ore (2) |
Revenues from product sales and services1 | $97 - $102 |
| |
Asia Pacific Iron Ore (3)Cost of goods sold and operating expense rate | $69 - $74 |
$50Less: | |
Freight expense rate2 | $757 |
| Depreciation, depletion & amortization rate | $4 |
| Cash cost of goods sold and operating expense rate | $58 - $80$63 |
| |
$30 - $35Sales volume (million long tons) | 20 |
$55Production volume (million long tons) | | $80 - $85 | | $35 - $4020 |
$60 | | $80 - $85 | | $40 - $45 |
$65 | | $80 - $85 | | $45 - $501 This expectation is based on the assumption that iron ore prices, steel prices, and pellet premiums will average for the remainder of 2018 their respective year-to-date averages. |
$70 | | $80 - $85 | | $50 - $55 |
$75 | | $80 - $85 | | $55 - $60 |
$80 | | $85 - $90 | | $60 - $65 |
(1) | The Platts IODEX is the benchmark assessment based2 Freight has an offsetting amount in revenue and has no impact on a standard specification of iron ore fines with 62 percent iron content (C.F.R. China). |
(2) | U.S. Iron Ore tons are reported in long tons of pellets. |
(3) | Asia Pacific Iron Ore tons are reported in metric tons of lumps and fines, F.O.B. the port.sales margin. |
U.S. Iron Ore Outlook (Long Tons)
For 2015,Based on the assumption that iron ore prices, steel prices, and pellet premiums will average for the remainder of 2018 their respective year-to-date averages, we would realize U.S. Iron Ore revenue rates in the range of $97 to $102 per long ton.
As previously disclosed, for 2018 we expect full-year sales and production volumevolumes of approximately 2220 million long tons from our U.S. Iron Ore business. As previously disclosed, we do not planThis compares to export any pellets out18.7 million long tons of the Great Lakessales and 18.8 million long tons of production in 2015.2017.
Our full-year 20152018 U.S. Iron Ore cash production cost expectation is $55 - $60 per ton. Our cash cost of goods sold per tonand operating expense expectation is $58 - $63 per long ton, which compares to $60 - $65. Thisper long ton for the full-year 2017.
SG&A Expenses and Other Expectations
Full-year 2018 SG&A expenses are expected to be approximately $115 million. We also note that of the $115 million expectation, reflects operational improvements including reduced headcount, more efficient maintenance practices and improvements in logistics. Depreciation, depletion and amortization forapproximately $20 million is considered non-cash. The increase compared to 2017 is partially attributable to a required accounting change related to the reclassification of certain Pension/OPEB components.
Our full-year 20152018 interest expense is expected to be approximately $5 per ton.
Asia Pacific Iron Ore Outlook (Metric Tons, F.O.B. the port)
Our full-year 2015 Asia Pacific Iron Ore expected sales and production volume is approximately 11$130 million, tons. The product mix is expected to be approximately 51 percent lump and 49 percent fines iron ore. This expectation assumes no divestiture of this business in 2015, which may or may not occur.
Based on an average exchange rate of $0.81 U.S. Dollar to Australian Dollar, full-year 2015 Asia Pacific Iron Ore cash production cost per ton is expected to be approximately $40 - $45. Cash cost of goods sold per ton is also expected to be $40 - $45. This expectation reflects operational improvements and a more favorable foreign exchange rate compared to 2014. We indicated that for every $0.01 change$132 million recorded in this exchange rate on a2017. Consolidated full-year basis, our cash cost of goods sold is impacted by approximately $7 million.
We anticipate depreciation, depletion and amortization to be approximately $2 per ton for full-year 2015.
North American Coal Outlook (Short Tons, F.O.B. the mine)
Our full-year 2015 North American Coal expected sales and production volume is approximately 5.5 million tons of low-volatile metallurgical coal from the two remaining mines, Pinnacle and Oak Grove. This expectation assumes no additional divestiture of this business in 2015, which may or may not occur.
Our full-year 2015 North American Coal revenues-per-ton outlook is $70 - $75. We have approximately 41 percent of our expected 2015 sales volume committed and priced at approximately $77 per short ton at the mine.
Our full-year 2015 North American Coal cash production cost expectation is $65 - $70 per ton. Our cash cost of goods sold per ton expectation is $70 - $75. Full-year 20152018 depreciation, depletion and amortization is expected to be approximately $2 per ton.$100 million, incurred ratably throughout the year.
The following table provides a summaryCapital Expenditures
Our 2018 capital spending expectations are:
Approximately $85 million in sustaining capital.
Approximately $250 million toward the HBI project in Toledo, OH (fully funded with the December 2017 debt offerings).
Approximately $50 million toward the upgrade of the 2015 guidance for our three remaining business segments:
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| | | | | | |
| | | 2015 Outlook Summary |
| | | U.S. Iron Ore (A) | Asia Pacific Iron Ore (B) | North American Coal (C) |
| Sales volume (million tons) | 22 | | 11 | | 5.5 |
| Production volume (million tons) | 22 | | 11 | | 5.5 |
| Cash production cost per ton | $55 - $60 | | $40 - $45 | | $65 - $70 |
| Cash cost of goods sold per ton | $60 - $65 | | $40 - $45 | | $70 - $75 |
| DD&A per ton | $5 | | $2 | | $2 |
| | | | | | | |
| (A) | U.S. Iron Ore tons are reported in long tons of pellets. |
| (B) | Asia Pacific Iron Ore tons are reported in metric tons of lumps and fines. |
| (C) | North American Coal tons are reported in short tons. |
Cash production cost and cash costNorthshore mine to produce up to 3.5 million long tons of goods sold per ton are non-GAAP financial measures that management uses in evaluating operating performance. The presentation of these measures is not intended to be considered in isolation from, asDR-grade pellets a substitute for, or as superior to, the financial information prepared and presented in accordance with U.S. GAAP. The presentation of these measures may be different from non-GAAP financial measures used by other companies. Cash production cost per ton is defined as cost of goods sold and operating expenses per ton less depreciation, depletion and amortization; as well as period costs, costs of services and inventory effects per ton. Cash cost per ton is defined as cost of goods sold and operating expenses per ton less depreciation, depletion and amortization per ton.
SG&A Expenses and Other Expectations
We are reducing our year-over-year SG&A expenses by approximately $70 million. Full-year 2015 SG&A expenses are expected to be approximately $140 million. The decrease is primarily driven by a reduction in headcount and reduced outside services spending as a result of a smaller global footprint. Cliffs' full-year cash outflow expectation for exploration spending is expected to be less than $5 million.
Consolidated full-year 2015 depreciation, depletion and amortization is expected to be approximately $150 million.
Capital Budget Update
We expect our full-year 2015 capital expenditures budget to be $125 - $150 million.year.
Recently Issued Accounting Pronouncements
Refer to NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES of the consolidated financial statements for a description of recent accounting pronouncements, including the respective dates of adoption and effects on results of operations and financial condition.
Critical Accounting Estimates
Management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. Preparation of financial statements requires management to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and the related disclosures of contingencies. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are fairly presented in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Management believes that the following critical accounting estimates and judgments have a significant impact on our financial statements.
Revenue Recognition
U.S. Iron Ore and Asia Pacific Iron Ore Provisional Pricing Arrangements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors. The base price is the primary component of the purchase price for each contract. The inflation-indexed price adjustment factors are integral to the iron ore supply contracts and vary based on the agreement, but typically include adjustments based upon changes in benchmark andthe Platts 62% Price, along with pellet premiums, published Platts international pellet pricesindexed freight rates and changes in specified ProducersProducer Price Indices, including those for industrial commodities, excluding fuel, cold rolled steelenergy and strip, and fuel and related products.steel. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. In most cases, these adjustment factors have not been finalized at the time our product is sold. In these cases, we historically have estimatedestimate the adjustment factors at each reporting period based upon the best third-party information available. The estimates are then adjusted to actual when the information has been finalized.
The Producer Price Indices remain an estimated component of the sales price throughout the contract year and are estimated each quarter using publicly available forecasts of such indices. The final indices referenced in certain of the U.S. Iron Ore supply contracts typically are not published by the U.S. Department of Labor until the second quarter of the subsequent year. As a result, we record an adjustment for the difference between the fourth quarter estimate and the final price in the following year.
Throughout the year, certain of our Asia Pacific Iron Ore customers have contractcontractual arrangements in which pricing settlements are based upon an average benchmark pricingindex price for future periods. Most of the future periods are settled within three months. To the extent the particular pricing settlement period is subsequent to the reporting period, we estimate the final pricing settlement based upon information available. Similar to U.S. Iron Ore, the estimates are then adjusted to actual when the price settlement period elapses.
Historically, provisionalProvisional pricing arrangement adjustments have not been material as they have represented less than half of one percent ofto U.S., Eastern Canadian and Asia Pacific Iron Ore's respective revenues for each of the three preceding fiscal years ended December 31, 2014, 20132017, 2016 and 2012.2015.
U.S. Iron Ore Customer Supply Agreements
In addition, certainCertain supply agreements with one U.S. Iron Ore customer include provisions for supplemental revenue or refunds based on the customer's average annual daily market price for hot-rolled coil steel pricing for the year that the product is consumed in the customer's blast furnaces. The supplemental pricing is characterized as a freestanding derivative and is required to be accounted for separately once the product is shipped. The derivative instrument, which is finalized based on a future price, is marked to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. The fair value of the instrument is determined using a market approach based on an estimate of the average annual realizeddaily market price of hot rolledfor hot-rolled coil steel, at the steelmaker's facilities, and takes into consideration current market conditions and nonperformance risk. At December 31, 2014,2017, we had a derivative asset of $63.2$37.9 million, representing the fair value of the pricing factors, based upon the amount of unconsumed long tons and an estimated average hot bandannual daily hot-rolled coil steel price related to the period in which the tonsiron ore are expected to be consumed in the customer's blast furnace at each respective steelmaking facility, subject to final pricing at a future date. This compares with a derivative asset of $55.8 million as of December 31, 2013, based upon the amount of unconsumed tons and the related estimated average hot band steel price.
The customer's average annual price is not known at the time of sale and the actual price is received on a delayed basis at the end of the year, once the average annual price has been finalized. As a result, we estimate the average price and adjust the estimate to actual in the fourth quarter when the information is provided by the customer at the end of each year. Information used in developing the estimate includes such factors as production and pricing information from the customer, current spot prices, third-party analyst forecasts, publications and other industry information. The accuracy of our estimates typically increases as the year progresses based on additional information in the market becoming available and the customer's abilityavailable. The supplemental revenue adjustments have not been material to more accurately determine the average price it will realizeU.S. Iron Ore's product revenues for the year. The following represents the historical accuracy of our pricing estimates related to the derivative as well as the impact on revenue resulting from the difference between the estimated price and the actual price for each quarter during 2014, 2013 and 2012 prior to receiving final information from the customer for tons consumed during each year:
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| | | 2014 | | 2013 | | 2012 |
| | | Final Price | | Estimated Price | | Impact on Revenue (in millions) | | Final Price | | Estimated Price | | Impact on Revenue (in millions) | | Final Price | | Estimated Price | | Impact on Revenue (in millions) |
| First Quarter | |
| $651 |
| |
| $645 |
| |
| $1.5 |
| |
| $622 |
| |
| $630 |
| |
| ($1.2 | ) | |
| $650 |
| |
| $698 |
| |
| ($9.8 | ) |
| Second Quarter | | 651 |
| | 650 |
| | 2.7 |
| | 622 |
| | 614 |
| | 3.0 |
| | 650 |
| | 678 |
| | (7.9 | ) |
| Third Quarter | | 651 |
| | 653 |
| | (3.4 | ) | | 622 |
| | 633 |
| | (2.1 | ) | | 650 |
| | 663 |
| | (3.3 | ) |
| Fourth Quarter | | 651 |
| | 651 |
| | — |
| | 622 |
| | 622 |
| | — |
| | 650 |
| | 650 |
| | — |
|
As an example, we estimate that a $75 change in the average hot band steel price realized from theyear ended December 31, 2014 estimated price recorded for the unconsumed tons remaining at year end would cause the fair value of the derivative instrument to increase or decrease by approximately $8.8 million, thereby impacting our consolidated revenues by the same amount.2017.
Mineral Reserves
We regularly evaluate our economic mineral reserves and update them as required in accordance with SEC Industry Guide 7. The estimated mineral reserves could be affected by future industry conditions, geological conditions and ongoing mine planning. Maintenance of effective production capacity of the mineral reserve could require increases in capital and development expenditures. Generally, as mining operations progress, haul lengths and lifts increase. Alternatively, changes in economic conditions or the expected quality of mineral reserves could decrease capacity orof mineral reserves. Technological progress could alleviate such factors or increase capacity of mineral reserves.
We use our mineral reserve estimates, combined with our estimated annual production levels, to determine the mine closure dates utilized in recording the fair value liability for asset retirement obligations.obligations for our active operating mines. Refer to NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS, for further information. Since the liability represents the present value of the expected future obligation, a significant change in mineral reserves or mine lives wouldcould have a substantial effect on the recorded obligation. We also utilize economic mineral reserves for evaluating potential impairments of mine assets and in determining maximum useful lives utilized to calculate depreciation and amortization of long-lived mine assets. Increases or decreases in mineral reserves or mine lives could significantly affect these items.
Valuation of Long-Lived Assets
In assessing the recoverability of our long-lived assets, significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets must be made, as well as the related estimated useful lives. If these estimates or their related assumptions change in the future as a result of changes in strategy or market conditions, we may be required to record impairment charges for these assets in the period such determination was made.
We monitor conditions that indicate that the carrying value of an asset or asset group may be impaired. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available. An impairment loss exists when projected undiscounted cash flows are less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market approach, income approach or cost approach. The impairment analysis and fair value determination can result in substantially different outcomes based on critical assumptions and estimates including the quantity and quality of remaining mineral reserves, future iron ore prices and production costs.
As a result of these assessments during 2017 and 2015, no material impairment charges were recorded related to long-lived tangible or intangible assets at our continuing operations. During 2016, there were no impairment indicators present; as a result, no impairment assessments were required.
Refer to NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, NOTE 4 - PROPERTY, PLANT AND EQUIPMENT and NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS for further information regarding our policy on asset impairment, detail on our remaining PP&E and mineral rights and non-recurring fair value measurements.
Investments In and Receivables From Canadian Entities and Contingent Claims
We determined the fair value and recoverability of our Canadian investments by comparing the estimated fair value of the underlying assets of the Canadian Entities to estimated liabilities. We estimated the fair value of major asset classes by using actual liquidation values through December 31, 2017 less estimated cost to sell. Outstanding liabilities include accounts payable and other liabilities, forward commitments, unsubordinated related party payables, lease liabilities, and other potential claims. Potential claims include an accrual for the estimated probable loss related to claims that may be asserted against the Canadian Entities under certain contracts. Based on our estimates, the fair value of liabilities exceeds the fair value of assets. To assess the fair value and recoverability of amounts receivable from the Canadian Entities, we estimated the fair value of the underlying net assets of the Canadian Entities available for distribution to their creditors in relation to the estimated creditor claims and the priority of those claims. Additionally, given that it is probable a preference claim will be asserted against us and/or certain of our affiliates, we recorded an estimated liability as a contingent claim. To assess the fair value of the contingent claim, we estimated the value by
utilizing the approximate value of our related-party claims against the Bloom Lake Group and the Wabush Group. Our estimates involve significant judgment and are based on currently available information, an assessment of the validity of certain claims, and estimated payments by the Canadian Entities. Our ultimate recovery, if any, is subject to the final liquidation value of the Canadian Entities and the distribution of the net proceeds as determined by the Canadian Court and may vary significantly from our current estimates. See NOTE 14 - DISCONTINUED OPERATIONS for further information.
Asset Retirement Obligations and Environmental Remediation Costs
The accrued mine closure obligations for our active mining operations provide for contractual and legal obligations associated with the eventual closure of the mining operations. We perform an in-depth evaluation of the liability every three years in addition to our routine annual assessments. In 2017, we employed a third-party specialist to assist in the evaluation. Our obligations are determined based on detailed estimates adjusted for factors that a market participant would consider (i.e., inflation, overhead and profit), which are escalated at an assumed rate of inflation to the estimated closure dates, and then discounted using the current credit-adjusted risk-free interest rate. The estimate also incorporates incremental increases in the closure cost estimates and changes in estimates of mine lives. The closure date for each location is determined based on the exhaustion date of the remaining iron ore reserves, which is dependent on our estimate of the economically recoverable mineral reserves. The estimated obligations are particularly sensitive to the impact of changes in mine lives given the difference between the inflation and discount rates. Changes in the base estimates of legal and contractual closure costs due to changes in legal or contractual requirements, available technology, inflation, overhead or profit rates also wouldcould have a significant impact on the recorded obligations.
We have a formal policy for environmental protection and restoration.remediation. Our obligations for known environmental matters at active and closed mining operations and other sites have been recognized based on estimates of the cost of investigation and remediation at each site. If the obligation can only be estimated as a range of possible amounts, with no specific amount being more likely, the minimum of the range is accrued. Management reviews its environmental remediation sites quarterly to determine if additional cost adjustments or disclosures are required. The characteristics of environmental remediation obligations, where information concerning the nature and extent of clean-up activities is not immediately available and which are subject to changes in regulatory requirements, result in a significant risk of increase to the obligations as they mature. Expected future expenditures are not discounted to present value unless the amount and timing of the cash disbursements can be reasonably estimated. Potential insurance recoveries are not recognized until realized. Refer to NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS, for further information.
Income Taxes
Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management's best assessment of estimated future taxes to be paid. We are subject to income taxes in both the U.S. and numerousvarious foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.
Deferred income taxes arise from temporary differences between tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
At December 31, 20142017 and 2013,2016, we had a valuation allowance of $2,224.5$2,238.5 million and $864.1$3,334.8 million, respectively, against our deferred tax assets. Our losses in certain locations in recent periods represented sufficient negative evidence to require a full valuation allowance against certain deferred tax assets. Additionally, significant Alternative Minimum tax credits have been generated in recent years. Sufficient negative evidence suggests that the credits will not be realized in the foreseeable future, and a full valuation allowance has been recorded on the deferred tax asset. We intend to maintain a valuation allowance against the deferred tax assets related to these operating losses, credits and allowances until sufficient positive evidence exists to support the realization of such assets.
Changes in tax laws and rates also could affect recorded deferred tax assets and liabilities in the future. Management is not awareIn 2017, both the U.S. and Luxembourg reduced the statutory rate; this decreased the deferred tax assets and related valuation allowance by $407.5 million. The U.S. tax legislation also repealed the corporate AMT which resulted in a
reversal of any such changes that would havethe valuation allowance related to the AMT credits and generated a material effect on$235.3 million long-term Income tax receivable, which will be refunded between the Company's results of operations, cash flows or financial position.years 2019 through 2022.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude ofvarious jurisdictions across our global operations. The ultimate impact of the U.S. income tax reform legislation may differ from our current estimates due to changes in the interpretations and assumptions made as well as additional regulatory guidance that may be issued.
Accounting for uncertainty in income taxes recognized in the financial statements requires that a tax benefit from an uncertain tax position be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on technical merits.
We recognize tax liabilities in accordance with ASC 740,Income Taxes, and we adjust these liabilities when our judgment changes as a result of evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.
Valuation of Goodwill
Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies. We assign goodwill arising from acquired companies to the reporting units that are expected to benefit from the synergies of the acquisition. Our reporting units are either at the operating segment level or a component one level below our operating segments that constitutes a business for which management generally reviews production and financial results
of that component. Decisions are often made as to capital expenditures, investments and production plans at the component level as part of the ongoing management of the related operating segment. We have determined that our Asia Pacific Iron Ore and Ferroalloys operating segments constitute separate reporting units, that CQIM and our Wabush mine within our Eastern Canadian Iron Ore operating segment constitute reporting units, and that our Northshore mine within our U.S. Iron Ore operating segment constitutes a reporting unit. Goodwill is allocated among and evaluated for impairment at the reporting unit level in the fourth quarter of each year or as circumstances occur that potentially indicate that the carrying amount of these assets may not be recoverable.
We use a two-step process to test goodwill for impairment. In the first step, we generally use a discounted cash flow analysis to determine the fair value of each reporting unit, which considers forecasted cash flows discounted at an estimated weighted average cost of capital. In assessing the valuation of our goodwill, significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of a reporting unit must be made, including among other things, estimates related to long-term price expectations, foreign currency exchange rates, expected capital expenditures and working capital requirements, which are based upon our long-range plan and life of mine estimates. If the discounted cash flow analysis yields a fair value estimate less than the reporting unit's carrying value, we would proceed to step two of the impairment test. In the second step, the implied fair value of the reporting unit's goodwill is determined by allocating the reporting unit's fair value to the assets and liabilities other than goodwill in a manner similar to a purchase price allocation. In performing this allocation of fair value to the assets and liabilities of the reporting unit, we typically utilize third-party valuation firms to support the fair values allocated. The resulting implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and, if the carrying amount exceeds the implied fair value, an impairment charge is recorded for the difference. If these estimates were to change in the future as a result of changes in strategy or market conditions, we may be required to record impairment charges for these assets in the period such determination was made.
During the third quarter of 2014, a goodwill impairment charge of $73.5 million was recorded for our Asia Pacific Iron Ore operating segment. The impairment charge was primarily a result of changes in estimates of long-term price forecasts were updated as part of management’s long-range planning process.
During the fourth quarter of 2013, a goodwill impairment charge of $80.9 million was recorded for our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment. The impairment charge was primarily a result of the decision to indefinitely suspend the Chromite Project and to not allocate significant additional capital for the project given the uncertain timeline and risks associated with the development of necessary infrastructure to bring the project online.
After performing our annual goodwill impairment test in the fourth quarter of 2012, we determined that $997.3 million and $2.7 million, respectively, of goodwill associated with our CQIM and Wabush reporting units, which are both included in the Eastern Canadian Iron Ore segment, was impaired as the carrying value of these reporting units exceeded their fair value.
As of December 31, 2014, our remaining value of goodwill is associated with our U.S. Iron Ore segment. The fair value of our Northshore reporting unit was substantially in excess of our carrying values as identified during our annual goodwill impairment test. The value of goodwill at our Northshore reporting unit totals $2.0 million. No other goodwill remains as of December 31, 2014.
Refer to NOTE 19 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES,INCOME TAXES, for further information regarding our policy on goodwill impairment.information.
Valuation of Long-Lived Assets
In assessing the recoverability of our long-lived assets, significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets must be made, as well as the related estimated useful lives. If these estimates or their related assumptions change in the future as a result of changes in strategy or market conditions, we may be required to record impairment charges for these assets in the period such determination was made.
We monitor conditions that indicate that the carrying value of an asset or asset group may be impaired. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available. An impairment loss exists when projected undiscounted cash flows are less than the carrying value of the assets. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the assets. Fair value can be determined using a market approach, income approach or cost approach. The impairment analysis and fair value determination can result in substantially
different outcomes based on critical assumptions and estimates including the quantity and quality of remaining economic ore reserves, future iron ore prices and production costs.
During the third and fourth quarter of 2014, we identified factors that indicate the carrying values of various asset groups may not be recoverable. Primary factors include that estimates of long-term price forecasts were updated as part of management’s long-range planning process. Updated estimates of long-term prices for all products, specifically the Platts 62 percent Fe fines spot price, which particularly effects Eastern Canadian Iron Ore and Asia Pacific Iron Ore business segments because their contracts correlate heavily to world market spot pricing, and the benchmark price for premium low-volatile hard coking coal were lower than prior estimates. These estimates were updated based upon current market conditions, macro-economic factors influencing the balance of supply and demand for our products and expectations for future cost and capital expenditure requirements. Additional factors include a new CEO, Lourenco Goncalves, appointed by the Board of Directors in early August 2014 and subsequently identified as the CODM in accordance with ASC 280, Segment Reporting. The new CODM views Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal and Ferroalloys as non-core assets and has communicated plans to evaluate the business units for a change in strategy including possible divestiture. These factors, among other considerations utilized in the individual impairment assessments, indicate that the carrying value of the respective asset groups, which resulted in an impairment of other long-lived assets of $8,956.4 million for the year ended December 31, 2014.
During the fourth quarter of 2013, we continued to experience higher than expected production costs and operational inefficiencies at our Wabush operations within our Eastern Canadian Iron Ore operating segment that have resulted in continued declines in our profitability of that business, which represents an asset group for purposes of testing our long-lived assets for recoverability. Upon completion of an impairment analysis, it was determined the fair value was less than the carrying value of the asset group, which resulted in an impairment of other long-lived assets of $154.6 million at December 31, 2013.
Due to lower than previously expected profits as a result of decreased iron ore pricing expectations and higher than anticipated production costs, we determined that indicators of impairment with respect to certain of our long-lived assets groups existed at December 31, 2012. Our asset groups generally consist of the assets and liabilities of one or more mines, preparation plants and associated reserves for which the lowest level of identifiable cash flows largely are independent of cash flows of other mines, preparation plants and associated reserves. As a result of this assessment, we determined that the cash flows associated with our Eastern Canadian pelletizing operations were not sufficient to support the recoverability of the carrying value of these productive assets. Accordingly, an asset impairment charge of $49.9 million was recorded related to the Wabush mine property, plant and equipment that were reported in our Eastern Canadian Iron Ore operating segment during the fourth quarter of 2012. No impairment charges were identified in connection with our other long-lived asset groups as of December 31, 2012.
Refer to NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, NOTE 4 - PROPERTY, PLANT AND EQUIPMENT and NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS for further information regarding our policy on asset impairment, detail on our remaining PP&E and mineral rights and non-recurring fair value measurements.
Employee Retirement Benefit Obligations
We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit plans, primarily consisting of retiree healthcare benefits, to most employees in North America as part of a total compensation and benefits program. We do not have employee retirement benefit obligations at our Asia Pacific Iron Ore operations. The defined benefit pension plans largely are noncontributory and benefits generally are based on employees' years of service and average earnings for a defined period prior to retirement, or a minimum formula.
Following is a summary of our U.S. defined benefit pension and OPEB funding and expense for the years 20122015 through 2015:2018:
|
| | | | | | | | | | | | | | | | |
| | | Pension | | OPEB |
| | | Funding | | Expense | | Funding | | Expense |
| 2012 | | $ | 67.7 |
| | $ | 55.2 |
| | $ | 39 |
| | $ | 28.1 |
|
| 2013 | | 53.7 |
| | 52.1 |
| | 25.5 |
| | 17.4 |
|
| 2014 | | 60.5 |
| | 31.3 |
| | 7.3 |
| | (0.7 | ) |
| 2015 (Estimated) | | 36.8 |
| | 23.6 |
| | 6.8 |
| | 6.0 |
|
|
| | | | | | | | | | | | | | | | |
| | | Pension | | OPEB |
| | | Funding | | Expense | | Funding | | Expense (Benefit) |
| 2015 | | $ | 35.7 |
| | $ | 23.9 |
| | $ | 3.5 |
| | $ | 4.4 |
|
| 2016 | | 1.2 |
| | 16.5 |
| | 1.1 |
| | (4.0 | ) |
| 2017 | | 24.4 |
| | 18.0 |
| | 2.1 |
| | (6.1 | ) |
| 2018 (Estimated) | | 27.7 |
| | 12.3 |
| | 4.0 |
| | (6.2 | ) |
Assumptions used in determining the benefit obligations and the value of plan assets for defined benefit pension plans and postretirement benefit plans (primarily retiree healthcare benefits) that we offer are evaluated periodically by management. Critical assumptions, such as the discount rate used to measure the benefit obligations, the expected long-term rate of return on plan assets, the medical care cost trend, and the rate of compensation increase are reviewed annually.
As of December 31, 20142017 and 2013,2016, we used the following assumptions:
| | | | Pension and Other Benefits | Pension and Other Benefits |
| | 2014 | | | 2013 |
| | 2017 | | | 2016 |
| |
| U.S. plan discount rate | 3.83 |
| % | | 4.57 |
| % | | | | |
| Canadian pension plan discount rate | 3.75 |
| | 4.50 |
| | |
| Canadian OPEB plan discount rate | 3.75 |
| | 4.75 |
| | |
| Iron Hourly Pension Plan | | 3.60 |
| % | | 4.02 |
| % |
| Salaried Pension Plan | | 3.52 |
| | 3.92 |
| |
| Ore Mining Pension Plan | | 3.61 |
| | 4.04 |
| |
| SERP | | 3.50 |
| | 3.90 |
| |
| Hourly OPEB Plan | | 3.60 |
| | 4.02 |
| |
| Salaried OPEB Plan | | 3.57 |
| | 3.99 |
| |
| U.S. rate of compensation increase - Salaried | 3.00 |
| | 4.00 |
| | 3.00 |
| | 3.00 |
| |
| U.S. rate of compensation increase - Hourly | 2.50 |
| | 3.00 |
| | 2.00 |
| | 2.00 |
| |
| Canadian rate of compensation increase | 3.00 |
| | 4.00 |
| | |
| U.S. pension plan expected return on plan assets | 8.25 |
| | 8.25 |
| | 8.25 |
| | 8.25 |
| |
| U.S. OPEB plan expected return on plan assets | 7.00 |
| | 7.00 |
| | 7.00 |
| | 7.00 |
| |
| Canadian expected return on plan assets | 7.25 |
| | 7.25 |
| | |
| Health care cost trend rate assumed for next year | | 7.00 |
| | 6.50 |
| |
| Ultimate health care cost trend rate | | 5.00 |
| | 5.00 |
| |
| Year that the ultimate rate is reached | | 2026 |
| | 2023 |
| |
The decrease in the discount rates in 20142017 was driven by the change in corporate bond yields, which were down approximately 8040 basis points compared to the prior year.
Additionally, on December 31, 2014, we adopted2017, the assumed mortality improvement projection was changed from generational scale MP-2016 to generational scale MP-2017. The healthy mortality assumption remains the RP-2014 mortality tables projected generationally using scale MP-2014 with blue collar and white collar adjustments made for certain hourly and salaried groups to determine the expected life of our plan participants, replacing the IRS 2014 prescribed mortality tables for our U.S. plans. For the Canadian plans, we adopted the 2014 Private Sector Canadian Pensioners’ Mortality Table for the hourly plans and the 2014 Canadian Pensioners’ Mortality Table for the salaried plans, where both tables were projected generationally using scale CPM-B, replacing the UP 1994 table with full projection.participants.
Following are sensitivities of potential further changes in these key assumptions on the estimated 20152018 pension and OPEB expense and the pension and OPEB benefit obligations as of December 31, 2014:2017:
|
| | | | | | | | | | | | | | | | |
| | | Increase in Expense | | Increase in Benefit Obligation |
| | | (In Millions) | | (In Millions) |
| | | Pension | | OPEB | | Pension | | OPEB |
| Decrease discount rate .25 percent | | $ | 2.3 |
| | $ | 0.7 |
| | $ | 35.3 |
| | $ | 13.6 |
|
| Decrease return on assets 1 percent | | 9.2 |
| | 2.6 |
| | N/A | | N/A |
| Increase medical trend rate 1 percent | | N/A | | 6.4 |
| | N/A | | 49.6 |
|
|
| | | | | | | | | | | | | | | | |
| | | Increase in Expense | | Increase in Benefit Obligation |
| | | (In Millions) | | (In Millions) |
| | | Pension | | OPEB | | Pension | | OPEB |
| Decrease discount rate 0.25% | | $ | 1.7 |
| | $ | 0.3 |
| | $ | 27.9 |
| | $ | 7.6 |
|
| Decrease return on assets 1.00% | | 7.3 |
| | 2.6 |
| | N/A |
| | N/A |
|
| Increase medical trend rate 1.00% | | N/A |
| | 2.5 |
| | N/A |
| | 21.2 |
|
Changes in actuarial assumptions, including discount rates, employee retirement rates, mortality, compensation levels, plan asset investment performance and healthcare costs, are determined based on analyses of actual and expected factors. Changes in actuarial assumptions and/or investment performance of plan assets may have a significant impact on our financial condition due to the magnitude of our retirement obligations. Refer to NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS, in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further information.
Forward-Looking Statements
This report contains statements that constitute "forward-looking statements" within the meaning of the federal securities laws. As a general matter, forward-looking statements relate to anticipated trends and expectations rather than historical matters. Forward-looking statements are subject to uncertainties and factors relating to Cliffs’ operations and business environment that are difficult to predict and may be beyond our control. Such uncertainties and factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements. These statements speak only as of the date of this report, and we undertake no ongoing obligation, other than that imposed by law, to update these statements. Uncertainties and risk factors that could affect Cliffs’ future performance and cause results to differ from the forward-looking statements in this report include, but are not limited to:
our ability to successfully execute an exit option for Bloom Lake mine that minimizes the cash outflowsuncertainty and associated liabilities of our Canadian operations including the CCAA process;
trends affecting our financial condition, results of operations or future prospects, particularly the continued volatility of iron ore and coal prices;
our actual levels of capital spending;
availability of capital and our ability to maintain adequate liquidity and successfully implement our financing plans;
uncertainty or weaknesses in global economic conditions, including downward pressure on prices caused by oversupply or imported products, the impact of barriers to trade, the outcomes of trade cases, reduced market demand and any slowing ofchange to the economic growth rate in China;
continued volatility of iron ore and steel prices and other trends, including the supply approach of the major iron ore producers, affecting our financial condition, results of operations or future prospects—specifically, the impact of price-adjustment factors on our sales contracts;
our ability to successfully identifydiversify our product mix and consummateadd new customers beyond our traditional blast furnace clientele, specifically successful completion of our HBI production plant;
our level of indebtedness could limit cash flow available to fund working capital, capital expenditures, acquisitions and other general corporate purposes or ongoing needs of our business;
availability of capital and our ability to maintain adequate liquidity;
risks related to former and current international operations, including our ability to successfully conclude the CCAA process in Canada and plan for the end of mine life in Australia in a manner that minimizes cash outflows and associated liabilities;
our actual economic iron ore reserves or changes in current mineral estimates, including whether any strategic investmentsmineralized material qualifies as a reserve;
the impact of our customers reducing their steel production due to increased market share of steel produced using other methods or lighter-weight steel alternatives;
the ability of our customers, joint venture partners and complete planned divestitures;significant suppliers and service providers to meet their obligations to us on a timely basis or at all;
the outcome of any litigation or arbitration, including any contractual disputes with our customers, joint venture partners or significant energy, material or service providers or any other litigation or arbitration;providers;
the ability of our customers and joint venture partners to meet their obligations to us on a timely basis or at all;
our ability to reach agreementmaintain satisfactory relations with our iron ore customers regarding any modifications to sales contract provisions;unions and employees;
the impact of price-adjustment factors on our sales contracts;
changes in sales volume or mix;
our actual economic iron ore and coal reserves or reductions in current mineral estimates, including whether any mineralized material qualifies as a reserve;
the impact of our customers using other methods to produce steel or reducing their steel production;
events or circumstances that could impair or adversely impact the viability of a mine and the carrying value of associated assets, as well as any resulting impairment charges;
the results of prefeasibility and feasibility studies in relation to projects;
impacts of existing and increasing governmental regulation and related costs and liabilities, including failure to receive or maintain required operating and environmental permits, approvals, modifications or other authorization of, or from, any governmental or regulatory entity and costs related to implementing improvements to ensure compliance with regulatory changes;
100problems or uncertainties with productivity, tons mined, transportation, capital spending, mine-closure obligations, environmental liabilities, employee-benefit costs and other risks of the mining industry;
our ability to cost-effectively achieve planned production rates or levels;levels, including at our HBI production plant;
our ability to successfully identify and consummate any strategic investments or development projects, including our HBI production plant;
changes in sales volume or mix;
our ability to reach agreement with our customers regarding any modifications to sales contract provisions, renewals or new arrangements;
events or circumstances that could impair or adversely impact the viability of a mine and the carrying value of associated assets, as well as any resulting impairment charges;
uncertainties associated with natural disasters, weather conditions, unanticipated geological conditions, supply or price of energy, equipment failures and other unexpected events;
adverse changes in currency values, currency exchange rates, interest rates and tax laws;
our abilityuncertainty relating to maintain appropriate relations with unionsrestructurings in the steel industry and/or affecting the steel industry; and employees and enter into or renew collective bargaining agreements on satisfactory terms;
risks related to international operations;
availability of capital equipment and component parts;
the potential existence of significant deficiencies or material weaknessweaknesses in our internal control over financial reporting; andreporting.
problems or uncertainties with productivity, tons mined, transportation, mine-closure obligations, environmental liabilities, employee-benefit costs and other risks of the mining industry.
For additional factors affecting the business of Cliffs, refer to Part I – Item 1A. Risk Factors. You are urged to carefully consider these risk factors.
Non-GAAP Reconciliation
We present cash cost of goods sold and operating expense rate per long/metric ton, which is a non-GAAP financial measure that management uses in evaluating operating performance. We believe our presentation of non-GAAP cash cost of goods sold and operating expenses is useful to investors because it excludes depreciation, depletion and amortization, which are non-cash, and freight and joint venture partners' cost reimbursements, which have no impact on sales margin, thus providing a more accurate view of the cash outflows related to the sale of iron ore. The presentation of this measure is not intended to be considered in isolation from, as a substitute for, or as superior to, the financial information prepared and presented in accordance with GAAP. The presentation of this measure may be different from non-GAAP financial measures used by other companies. Below is a reconciliation in dollars of this non-GAAP financial measure to our consolidated financial statements for the years ended December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | Year Ended December 31, | | Year Ended December 31, |
| | | 2017 | | 2016 |
| | | U.S. Iron Ore | | Asia Pacific Iron Ore | | Total | | U.S. Iron Ore | | Asia Pacific Iron Ore | | Total |
| Cost of goods sold and operating expenses | | $ | (1,400.6 | ) | | $ | (427.9 | ) | | $ | (1,828.5 | ) | | $ | (1,278.8 | ) | | $ | (440.9 | ) | | $ | (1,719.7 | ) |
| Less: | | | | | | | | | | | | |
| Freight and reimbursements | | (221.4 | ) | | (19.6 | ) | | (241.0 | ) | | (174.8 | ) | | (20.7 | ) | | (195.5 | ) |
| Depreciation, depletion & amortization | | (66.6 | ) | | (14.3 | ) | | (80.9 | ) | | (84.0 | ) | | (25.1 | ) | | (109.1 | ) |
| Cash cost of goods sold and operating expenses | | $ | (1,112.6 | ) | | $ | (394.0 | ) | | $ | (1,506.6 | ) | | $ | (1,020.0 | ) | | $ | (395.1 | ) | | $ | (1,415.1 | ) |
Below is a reconciliation in dollars of this non-GAAP measure to our consolidated financial statements for the years ended December 31, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 |
| | | U.S. Iron Ore | | Asia Pacific Iron Ore | | Total | | U.S. Iron Ore | | Asia Pacific Iron Ore | | Total |
| Cost of goods sold and operating expenses | | $ | (1,278.8 | ) | | $ | (440.9 | ) | | $ | (1,719.7 | ) | | $ | (1,298.3 | ) | | $ | (478.5 | ) | | $ | (1,776.8 | ) |
| Less: | | | | | | | | | | | | |
| Freight and reimbursements | | (174.8 | ) | | (20.7 | ) | | (195.5 | ) | | (157.3 | ) | | (23.6 | ) | | (180.9 | ) |
| Depreciation, depletion & amortization | | (84.0 | ) | | (25.1 | ) | | (109.1 | ) | | (98.9 | ) | | (25.3 | ) | | (124.2 | ) |
| Cash cost of goods sold and operating expenses | | $ | (1,020.0 | ) | | $ | (395.1 | ) | | $ | (1,415.1 | ) | | $ | (1,042.1 | ) | | $ | (429.6 | ) | | $ | (1,471.7 | ) |
|
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Information regarding our Market Risk is presented under the caption Market Risks, which is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated by reference and made a part hereof.
|
| |
| Item 8. | Financial Statements and Supplementary Data |
Statements of Consolidated Financial Position
Cliffs Natural ResourcesCleveland-Cliffs Inc. and Subsidiaries
| | | | (In Millions) | (In Millions) |
| | December 31, | December 31, |
| | 2014 | | 2013 | 2017 | | 2016 |
| ASSETS | | | | | | |
| CURRENT ASSETS | | | | | | |
| Cash and cash equivalents | $ | 290.9 |
| | $ | 335.5 |
| $ | 1,007.7 |
| | $ | 323.4 |
|
| Accounts receivable, net | 205.6 |
| | 270.0 |
| 140.6 |
| | 128.7 |
|
| Inventories | 326.7 |
| | 391.4 |
| 183.4 |
| | 178.4 |
|
| Supplies and other inventories | 195.2 |
| | 216.0 |
| 93.9 |
| | 91.4 |
|
| Income tax receivable | 237.7 |
| | 74.1 |
| |
| Derivative assets | | 39.4 |
| | 33.1 |
|
| Loans to and accounts receivables from the Canadian Entities | | 51.6 |
| | 48.6 |
|
| Other current assets | 192.8 |
| | 273.0 |
| 28.0 |
| | 21.0 |
|
| TOTAL CURRENT ASSETS | 1,448.9 |
| | 1,560.0 |
| 1,544.6 |
| | 824.6 |
|
| PROPERTY, PLANT AND EQUIPMENT, NET | 1,414.9 |
| | 11,153.4 |
| 1,051.0 |
| | 984.4 |
|
| OTHER ASSETS | | | | |
| Deferred income taxes | 156.4 |
| | 41.5 |
| |
| Income tax receivable | | 235.3 |
| | — |
|
| Other non-current assets | 143.8 |
| | 367.0 |
| 122.5 |
| | 114.9 |
|
| TOTAL OTHER ASSETS | 300.2 |
| | 408.5 |
| |
| TOTAL ASSETS | $ | 3,164.0 |
| | $ | 13,121.9 |
| $ | 2,953.4 |
| | $ | 1,923.9 |
|
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
Statements of Consolidated Financial Position
Cliffs Natural ResourcesCleveland-Cliffs Inc. and Subsidiaries - (Continued)
| | | | (In Millions) | (In Millions) |
| | December 31, | December 31, |
| | 2014 | | 2013 | 2017 | | 2016 |
| LIABILITIES | | | | | | |
| CURRENT LIABILITIES | | | | | | |
| Accounts payable | $ | 272.1 |
| | $ | 345.5 |
| $ | 127.7 |
| | $ | 107.6 |
|
| Accrued employment costs | 99.5 |
| | 129.0 |
| 56.1 |
| | 56.1 |
|
| Income taxes payable | 1.0 |
| | 55.6 |
| |
| State and local taxes payable | 52.5 |
| | 61.7 |
| 30.2 |
| | 28.3 |
|
| Current portion of debt | 21.8 |
| | 20.9 |
| |
| Accrued expenses | 255.3 |
| | 206.4 |
| 33.7 |
| | 41.1 |
|
| Accrued interest | | 31.4 |
| | 40.2 |
|
| Accrued royalties | 31.2 |
| | 57.3 |
| 17.3 |
| | 26.2 |
|
| Current portion of capital leases | 74.5 |
| | 49.0 |
| |
| Contingent claims | | 55.6 |
| | — |
|
| Partnership distribution payable | | 44.2 |
| | 8.7 |
|
| Other current liabilities | 150.7 |
| | 160.1 |
| 56.0 |
| | 82.9 |
|
| TOTAL CURRENT LIABILITIES | 958.6 |
| | 1,085.5 |
| 452.2 |
| | 391.1 |
|
| POSTEMPLOYMENT BENEFIT LIABILITIES | | | | | | |
| Pensions | 275.4 |
| | 197.5 |
| 222.8 |
| | 245.7 |
|
| Other postretirement benefits | 119.8 |
| | 96.5 |
| 34.9 |
| | 34.8 |
|
| TOTAL POSTEMPLOYMENT BENEFIT LIABILITIES | 395.2 |
| | 294.0 |
| 257.7 |
| | 280.5 |
|
| ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS | 256.0 |
| | 309.7 |
| 196.5 |
| | 193.9 |
|
| DEFERRED INCOME TAXES | 51.3 |
| | 1,146.5 |
| |
| LONG-TERM DEBT | 2,962.3 |
| | 3,022.6 |
| 2,304.2 |
| | 2,175.1 |
|
| OTHER LIABILITIES | 274.9 |
| | 379.3 |
| 186.9 |
| | 213.8 |
|
| TOTAL LIABILITIES | 4,898.3 |
| | 6,237.6 |
| 3,397.5 |
| | 3,254.4 |
|
| COMMITMENTS AND CONTINGENCIES (SEE NOTE 20) |
| |
|
| |
|
| EQUITY | | | | | | |
| CLIFFS SHAREHOLDERS' EQUITY | | | | |
| CLIFFS SHAREHOLDERS' DEFICIT | | | | |
| Preferred Stock - no par value | | | | | | |
| Class A - 3,000,000 shares authorized | | | | | | |
| 7% Series A Mandatory Convertible, Class A, no par value and $1,000 per share liquidation preference (See Note 15) | | | | |
| Issued and Outstanding - 731,223 shares (2013 - 731,250) | 731.3 |
| | 731.3 |
| |
| Class B - 4,000,000 shares authorized | | | | | | |
| Common Shares - par value $0.125 per share | | | | | | |
| Authorized - 400,000,000 shares (2013 - 400,000,000 shares); | | | | |
| Issued - 159,546,224 shares (2013 - 159,546,224 shares); | | | | |
| Outstanding - 153,246,754 shares (2013 - 153,126,291 shares) | 19.8 |
| | 19.8 |
| |
| Authorized - 600,000,000 shares (2016 - 400,000,000 shares); | | | | |
| Issued - 301,886,794 shares (2016 - 238,636,794 shares); | | | | |
| Outstanding - 297,400,968 shares (2016 - 233,074,091 shares) | | 37.7 |
| | 29.8 |
|
| Capital in excess of par value of shares | 2,309.8 |
| | 2,329.5 |
| 3,933.9 |
| | 3,347.0 |
|
| Retained earnings (Accumulated deficit) | (3,960.7 | ) | | 3,407.3 |
| |
| Cost of 6,299,470 common shares in treasury (2013 - 6,419,933 shares) | (285.7 | ) | | (305.5 | ) | |
| Retained deficit | | (4,207.3 | ) | | (4,574.3 | ) |
| Cost of 4,485,826 common shares in treasury (2016 - 5,562,703 shares) | | (169.6 | ) | | (245.5 | ) |
| Accumulated other comprehensive loss | (245.8 | ) | | (112.9 | ) | (39.0 | ) | | (21.3 | ) |
| TOTAL CLIFFS SHAREHOLDERS' EQUITY (DEFICIT) | (1,431.3 | ) | | 6,069.5 |
| |
| NONCONTROLLING INTEREST (DEFICIT) | (303.0 | ) | | 814.8 |
| |
| TOTAL EQUITY (DEFICIT) | (1,734.3 | ) | | 6,884.3 |
| |
| TOTAL LIABILITIES AND EQUITY (DEFICIT) | $ | 3,164.0 |
| | $ | 13,121.9 |
| |
| TOTAL CLIFFS SHAREHOLDERS' DEFICIT | | (444.3 | ) | | (1,464.3 | ) |
| NONCONTROLLING INTEREST | | 0.2 |
| | 133.8 |
|
| TOTAL DEFICIT | | (444.1 | ) | | (1,330.5 | ) |
| TOTAL LIABILITIES AND DEFICIT | | $ | 2,953.4 |
| | $ | 1,923.9 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Statements of Consolidated Operations
Cliffs Natural ResourcesCleveland-Cliffs Inc. and Subsidiaries
| | | | (In Millions, Except Per Share Amounts) | (In Millions, Except Per Share Amounts) |
| | Year Ended December 31, | Year Ended
December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| REVENUES FROM PRODUCT SALES AND SERVICES | | | | | | | | | | |
| Product | $ | 4,230.8 |
| | $ | 5,346.6 |
| | $ | 5,520.9 |
| $ | 2,089.2 |
| | $ | 1,913.5 |
| | $ | 1,832.4 |
|
| Freight and venture partners' cost reimbursements | 392.9 |
| | 344.8 |
| | 351.8 |
| 241.0 |
| | 195.5 |
| | 180.9 |
|
| 4,623.7 |
| | 5,691.4 |
| | 5,872.7 |
| 2,330.2 |
| | 2,109.0 |
| | 2,013.3 |
|
| COST OF GOODS SOLD AND OPERATING EXPENSES | (4,172.3 | ) | | (4,542.1 | ) | | (4,700.6 | ) | (1,828.5 | ) | | (1,719.7 | ) | | (1,776.8 | ) |
| SALES MARGIN | 451.4 |
| | 1,149.3 |
| | 1,172.1 |
| 501.7 |
| | 389.3 |
| | 236.5 |
|
| OTHER OPERATING INCOME (EXPENSE) | | | | | | | | | | |
| Selling, general and administrative expenses | (208.7 | ) | | (231.6 | ) | | (282.5 | ) | (105.8 | ) | | (117.8 | ) | | (110.0 | ) |
| Exploration costs | (8.8 | ) | | (59.0 | ) | | (142.8 | ) | |
| Impairment of goodwill and other long-lived assets | (9,029.9 | ) | | (250.8 | ) | | (1,049.9 | ) | |
| Gain (loss) on disposal of other assets | (423.0 | ) | | 16.7 |
| | 1.2 |
| |
| Miscellaneous - net | (226.3 | ) | | 46.4 |
| | (6.9 | ) | 27.7 |
| | (30.7 | ) | | 24.8 |
|
| | (9,896.7 | ) | | (478.3 | ) | | (1,480.9 | ) | (78.1 | ) | | (148.5 | ) | | (85.2 | ) |
| OPERATING INCOME (LOSS) | (9,445.3 | ) | | 671.0 |
| | (308.8 | ) | |
| OPERATING INCOME | | 423.6 |
| | 240.8 |
| | 151.3 |
|
| OTHER INCOME (EXPENSE) | | | | | | | | | | |
| Interest expense, net | (185.2 | ) | | (179.1 | ) | | (195.6 | ) | (132.0 | ) | | (200.5 | ) | | (228.5 | ) |
| Gain (loss) on extinguishment/restructuring of debt | | (165.4 | ) | | 166.3 |
| | 392.9 |
|
| Other non-operating income (expense) | 26.8 |
| | (2.6 | ) | | 2.6 |
| 3.2 |
| | 0.4 |
| | (2.6 | ) |
| | (158.4 | ) | | (181.7 | ) | | (193.0 | ) | (294.2 | ) | | (33.8 | ) | | 161.8 |
|
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY INCOME (LOSS) FROM VENTURES | (9,603.7 | ) | | 489.3 |
| | (501.8 | ) | |
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY LOSS FROM VENTURES | | 129.4 |
| | 207.0 |
| | 313.1 |
|
| INCOME TAX BENEFIT (EXPENSE) | 1,302.0 |
| | (55.1 | ) | | (255.9 | ) | 252.4 |
| | 12.2 |
| | (169.3 | ) |
| EQUITY LOSS FROM VENTURES, net of tax | (9.9 | ) | | (74.4 | ) | | (404.8 | ) | — |
| | — |
| | (0.1 | ) |
| INCOME (LOSS) FROM CONTINUING OPERATIONS | (8,311.6 | ) | | 359.8 |
| | (1,162.5 | ) | |
| INCOME and GAIN ON SALE FROM DISCONTINUED OPERATIONS, net of tax | — |
| | 2.0 |
| | 35.9 |
| |
| INCOME FROM CONTINUING OPERATIONS | | 381.8 |
| | 219.2 |
| | 143.7 |
|
| LOSS FROM DISCONTINUED OPERATIONS, net of tax | | (18.7 | ) | | (19.9 | ) | | (892.1 | ) |
| NET INCOME (LOSS) | (8,311.6 | ) | | 361.8 |
| | (1,126.6 | ) | 363.1 |
| | 199.3 |
| | (748.4 | ) |
| LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST | 1,087.4 |
| | 51.7 |
| | 227.2 |
| |
| LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST | | 3.9 |
| | (25.2 | ) | | (0.9 | ) |
| (Year Ended December 31, 2017 and 2016 - No loss related to Discontinued Operations and Year Ended December 31, 2015 - Loss of $7.7 million) | | |
| NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | (7,224.2 | ) | | $ | 413.5 |
| | $ | (899.4 | ) | $ | 367.0 |
| | $ | 174.1 |
| | $ | (749.3 | ) |
| PREFERRED STOCK DIVIDENDS | (51.2 | ) | | (48.7 | ) | | — |
| — |
| | — |
| | (38.4 | ) |
| NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS | $ | (7,275.4 | ) | | $ | 364.8 |
| | $ | (899.4 | ) | $ | 367.0 |
| | $ | 174.1 |
| | $ | (787.7 | ) |
| | | | | | | | | | | |
| EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC | | | | | | | | | | |
| Continuing operations | $ | (47.52 | ) | | $ | 2.39 |
| | $ | (6.57 | ) | $ | 1.34 |
| | $ | 0.98 |
| | $ | 0.63 |
|
| Discontinued operations | — |
| | 0.01 |
| | 0.25 |
| (0.06 | ) | | (0.10 | ) | | (5.77 | ) |
| $ | (47.52 | ) | | $ | 2.40 |
| | $ | (6.32 | ) | $ | 1.28 |
| | $ | 0.88 |
| | $ | (5.14 | ) |
| EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED | | | | | | | | | | |
| Continuing operations | $ | (47.52 | ) | | $ | 2.36 |
| | $ | (6.57 | ) | $ | 1.32 |
| | $ | 0.97 |
| | $ | 0.63 |
|
| Discontinued operations | — |
| | 0.01 |
| | 0.25 |
| (0.06 | ) | | (0.10 | ) | | (5.76 | ) |
| | $ | (47.52 | ) | | $ | 2.37 |
| | $ | (6.32 | ) | $ | 1.26 |
| | $ | 0.87 |
| | $ | (5.13 | ) |
| AVERAGE NUMBER OF SHARES (IN THOUSANDS) | | | | | | | | | | |
| Basic | 153,098 |
| | 151,726 |
| | 142,351 |
| 288,435 |
| | 197,659 |
| | 153,230 |
|
| Diluted | 153,098 |
| | 174,323 |
| | 142,351 |
| 292,961 |
| | 200,145 |
| | 153,605 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Statements of Consolidated Comprehensive Income (Loss)
Cliffs Natural ResourcesCleveland-Cliffs Inc. and Subsidiaries
| | | | (In Millions) | (In Millions) |
| | Year Ended December 31, | Year Ended
December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | (7,224.2 | ) | | $ | 413.5 |
| | $ | (899.4 | ) | $ | 367.0 |
| | $ | 174.1 |
| | $ | (749.3 | ) |
| OTHER COMPREHENSIVE INCOME (LOSS) | | | | | | | | | | |
| Pension and OPEB liability, net of tax | (91.0 | ) | | 208.3 |
| | 33.8 |
| 11.5 |
| | (19.8 | ) | | 45.2 |
|
| Unrealized net gain (loss) on marketable securities, net of tax | (7.2 | ) | | 3.1 |
| | (0.5 | ) | |
| Unrealized net gain on marketable securities, net of tax | | — |
| | — |
| | 1.7 |
|
| Unrealized net gain (loss) on foreign currency translation | (42.3 | ) | | (208.6 | ) | | 3.8 |
| (13.9 | ) | | 18.6 |
| | 155.6 |
|
| Unrealized net gain (loss) on derivative financial instruments, net of tax | 2.8 |
| | (29.6 | ) | | 7.5 |
| (0.5 | ) | | (2.6 | ) | | 20.7 |
|
| OTHER COMPREHENSIVE INCOME (LOSS) | (137.7 | ) | | (26.8 | ) | | 44.6 |
| (2.9 | ) | | (3.8 | ) | | 223.2 |
|
| OTHER COMPREHENSIVE LOSS (INCOME) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST | 4.8 |
| | (30.5 | ) | | (7.6 | ) | (1.1 | ) | | 0.5 |
| | 4.6 |
|
| TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | (7,357.1 | ) | | $ | 356.2 |
| | $ | (862.4 | ) | $ | 363.0 |
| | $ | 170.8 |
| | $ | (521.5 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
Statements of Consolidated Cash Flows
Cliffs Natural ResourcesCleveland-Cliffs Inc. and Subsidiaries
| | | | (In Millions) | (In Millions) |
| | Year Ended December 31, | Year Ended
December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| OPERATING ACTIVITIES | | | | | | | | | | |
| Net income (loss) | $ | (8,311.6 | ) | | $ | 361.8 |
| | $ | (1,126.6 | ) | $ | 363.1 |
| | $ | 199.3 |
| | $ | (748.4 | ) |
| Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | | | | | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
| Depreciation, depletion and amortization | 504.0 |
| | 593.3 |
| | 525.8 |
| 87.7 |
| | 115.4 |
| | 134.0 |
|
| Impairment of goodwill and other long-lived assets | 9,029.9 |
| | 250.8 |
| | 1,049.9 |
| |
| Equity loss in ventures (net of tax) | 9.9 |
| | 74.4 |
| | 404.8 |
| |
| Impairment of long-lived assets | | — |
| | — |
| | 76.6 |
|
| Deferred income taxes | (1,153.9 | ) | | (138.1 | ) | | 127.0 |
| — |
| | — |
| | 159.8 |
|
| Changes in deferred revenue and below-market sales contracts | (18.0 | ) | | (52.8 | ) | | (24.5 | ) | |
| Loss on sale of Cliffs Logan County Coal | 419.6 |
| | — |
| | — |
| |
| Loss (gain) on extinguishment/restructuring of debt | | 165.4 |
| | (166.3 | ) | | (392.9 | ) |
| Loss on deconsolidation, net of cash deconsolidated | | 20.2 |
| | 17.5 |
| | 668.3 |
|
| Other | (37.7 | ) | | (3.3 | ) | | (40.9 | ) | 21.2 |
| | 10.0 |
| | 61.1 |
|
| Changes in operating assets and liabilities: | | | | | | | | | | |
| Receivables and other assets | (82.8 | ) | | 138.8 |
| | (74.8 | ) | (248.7 | ) | | 43.2 |
| | 369.1 |
|
| Product inventories | 37.8 |
| | 30.8 |
| | 39.9 |
| (1.8 | ) | | 157.8 |
| | (62.0 | ) |
| Payables and accrued expenses | (38.3 | ) | | (109.8 | ) | | (366.1 | ) | (69.0 | ) | | (73.9 | ) | | (227.7 | ) |
| Net cash provided by operating activities | 358.9 |
| | 1,145.9 |
| | 514.5 |
| 338.1 |
| | 303.0 |
| | 37.9 |
|
| INVESTING ACTIVITIES | | | | | | | | | | |
| Purchase of property, plant and equipment | (284.1 | ) | | (861.6 | ) | | (1,127.5 | ) | (151.7 | ) | | (69.1 | ) | | (80.8 | ) |
| Proceeds from sale of Cliffs Logan County Coal | 155.0 |
| | — |
| | — |
| |
| Proceeds from sale of Sonoma | — |
| | — |
| | 152.6 |
| |
| Other investing activities | 25.5 |
| | 50.3 |
| | 13.1 |
| (4.3 | ) | | 11.2 |
| | (22.4 | ) |
| Net cash used in investing activities | (103.6 | ) | | (811.3 | ) | | (961.8 | ) | |
| Net cash used by investing activities | | (156.0 | ) | | (57.9 | ) | | (103.2 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | |
| Net proceeds from issuance of Series A, Mandatory Convertible Preferred Stock, Class A | — |
| | 709.4 |
| | — |
| |
| Net proceeds from issuance of common shares | — |
| | 285.3 |
| | — |
| 661.3 |
| | 287.4 |
| | — |
|
| Net proceeds from issuance of senior notes | — |
| | — |
| | 497.0 |
| |
| Repayment of term loan | — |
| | (847.1 | ) | | (124.8 | ) | |
| Proceeds from issuance of debt | | 1,771.5 |
| | — |
| | 503.5 |
|
| Debt issuance costs | | (28.6 | ) | | (5.2 | ) | | (33.6 | ) |
| Borrowings under credit facilities | 1,219.5 |
| | 670.5 |
| | 1,012.0 |
| — |
| | 105.0 |
| | 309.8 |
|
| Repayment under credit facilities | (1,219.5 | ) | | (995.5 | ) | | (687.0 | ) | — |
| | (105.0 | ) | | (309.8 | ) |
| Proceeds from equipment loans | — |
| | 164.8 |
| | — |
| |
| Repayments of equipment loans | (20.9 | ) | | (3.0 | ) | | — |
| — |
| | (95.6 | ) | | (45.4 | ) |
| Repayment of senior notes | — |
| | — |
| | (325.0 | ) | |
| Repurchase of debt | (28.8 | ) | | — |
| | — |
| (1,720.7 | ) | | (305.4 | ) | | (225.9 | ) |
| Contributions (to)/by joint ventures, net | (25.7 | ) | | 23.3 |
| | 95.4 |
| |
| Common stock dividends | (92.5 | ) | | (91.9 | ) | | (307.2 | ) | |
| Acquisition of noncontrolling interest | | (105.0 | ) | | — |
| | — |
|
| Distributions of partnership equity | | (52.9 | ) | | (59.9 | ) | | (40.6 | ) |
| Preferred stock dividends | (51.2 | ) | | (35.7 | ) | | — |
| — |
| | — |
| | (51.2 | ) |
| Other financing activities | (69.2 | ) | | (52.0 | ) | | (40.8 | ) | (26.7 | ) | | (27.7 | ) | | (45.8 | ) |
| Net cash (used in) provided by financing activities | (288.3 | ) | | (171.9 | ) | | 119.6 |
| |
| Net cash provided (used) by financing activities | | 498.9 |
| | (206.4 | ) | | 61.0 |
|
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | (11.6 | ) | | (22.4 | ) | | 1.3 |
| 3.3 |
| | (0.5 | ) | | (1.4 | ) |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (44.6 | ) | | 140.3 |
| | (326.4 | ) | 684.3 |
| | 38.2 |
| | (5.7 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 335.5 |
| | 195.2 |
| | 521.6 |
| |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 290.9 |
| | $ | 335.5 |
| | $ | 195.2 |
| |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | | 323.4 |
| | 285.2 |
| | 290.9 |
|
| CASH AND CASH EQUIVALENTS AT END OF YEAR | | $ | 1,007.7 |
| | $ | 323.4 |
| | $ | 285.2 |
|
The accompanying notes are an integral part of these consolidated financial statements.
See NOTE 17 - CASH FLOW INFORMATION.
Statements of Consolidated Changes in Equity
Cliffs Natural ResourcesCleveland-Cliffs Inc. and Subsidiaries
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | (In Millions) |
| | | | | | Cliffs Shareholders | | | | |
| | Number
of
Depositary Shares | | Depositary
Shares | | Number
of
Common
Shares | | Common
Shares | | Capital in
Excess of
Par Value
of Shares | | Retained
Earnings | | Common
Shares
in
Treasury | | Accumulated
Other
Comprehensive
Income
(Loss) | | Non-
Controlling
Interest | | Total |
| January 1, 2012 | — |
| | $ | — |
| | 142.0 |
| | $ | 18.5 |
| | $ | 1,770.8 |
| | $ | 4,424.3 |
| | $ | (336.0 | ) | | $ | (92.6 | ) | | $ | 1,254.7 |
| | $ | 7,039.7 |
|
| Comprehensive income | | | | | | | | | | | | | | | | | | | |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | (899.4 | ) | | — |
| | — |
| | (227.2 | ) | | (1,126.6 | ) |
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 37.0 |
| | 7.6 |
| | 44.6 |
|
| Total comprehensive income (loss) | | | | | | | | | | | | | | | | | (219.6 | ) | | (1,082.0 | ) |
Purchase of subsidiary shares from
noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2.1 | ) | | (2.1 | ) |
Undistributed losses to noncontrolling
interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.4 |
| | 0.4 |
|
Capital contribution by noncontrolling
interest to subsidiary | — |
| | — |
| | — |
| | — |
| | 1.6 |
| | — |
| | — |
| | — |
| | 102.8 |
| | 104.4 |
|
| Acquisition of controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8.0 | ) | | (8.0 | ) |
| Stock and other incentive plans | — |
| | — |
| | 0.5 |
| | — |
| | 2.3 |
| | — |
| | 13.4 |
| | — |
| | — |
| | 15.7 |
|
Common stock dividends ($2.16 per
share) | — |
| | — |
| | — |
| | — |
| | — |
| | (307.2 | ) | | — |
| | — |
| | — |
| | (307.2 | ) |
| December 31, 2012 | — |
| | $ | — |
| | 142.5 |
| | $ | 18.5 |
| | $ | 1,774.7 |
| | $ | 3,217.7 |
| | $ | (322.6 | ) | | $ | (55.6 | ) | | $ | 1,128.2 |
| | $ | 5,760.9 |
|
| Comprehensive income | | | | | | | | | | | | | | | | | | | |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 413.5 |
| | — |
| | — |
| | (51.7 | ) | | 361.8 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (57.3 | ) | | 30.5 |
| | (26.8 | ) |
| Total comprehensive income (loss) | | | | | | | | | | | | | | | | | (21.2 | ) | | 335.0 |
|
| Equity offering | — |
| | — |
| | 10.4 |
| | 1.3 |
| | 284.0 |
| | — |
| | — |
| | — |
| | — |
| | 285.3 |
|
Capital contribution by noncontrolling
interest to subsidiary | — |
| | — |
| | — |
| | — |
| | 0.2 |
| | (0.6 | ) | | — |
| | — |
| | 5.6 |
| | 5.2 |
|
| Acquisition of controlling interest | — |
| | — |
| | — |
| | — |
| | 295.4 |
| | (82.7 | ) | | — |
| | — |
| | (314.8 | ) | | (102.1 | ) |
Undistributed losses to noncontrolling
interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17.0 |
| | 17.0 |
|
| Stock and other incentive plans | — |
| | — |
| | 0.3 |
| | — |
| | (2.9 | ) | | — |
| | 17.1 |
| | — |
| | — |
| | 14.2 |
|
| Depositary Shares | 29.3 |
| | 731.3 |
| | — |
| | — |
| | (21.9 | ) | | — |
| | — |
| | — |
| | — |
| | 709.4 |
|
Common stock dividends ($0.60 per
share) | — |
| | — |
| | — |
| | — |
| | — |
| | (91.9 | ) | | — |
| | — |
| | — |
| | (91.9 | ) |
Preferred stock dividends ($1.66 per
depositary share) | — |
| | — |
| | — |
| | — |
| | — |
| | (48.7 | ) | | — |
| | — |
| | — |
| | (48.7 | ) |
| December 31, 2013 | 29.3 |
| | $ | 731.3 |
| | 153.2 |
| | $ | 19.8 |
| | $ | 2,329.5 |
| | $ | 3,407.3 |
| | $ | (305.5 | ) | | $ | (112.9 | ) | | $ | 814.8 |
| | $ | 6,884.3 |
|
| Comprehensive income | | | | | | | | | | | | | | | | | | | |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | (7,224.2 | ) | | — |
| | — |
| | (1,087.4 | ) | | (8,311.6 | ) |
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (132.9 | ) | | (4.8 | ) | | (137.7 | ) |
| Total comprehensive income (loss) | | | | | | | | | | | | | | | | | (1,092.2 | ) | | (8,449.3 | ) |
Capital contribution to noncontrolling
interest to subsidiary | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | (0.1 | ) |
Distributions to noncontrolling
interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (25.5 | ) | | (25.5 | ) |
| Stock and other incentive plans | — |
| | — |
| | — |
| | — |
| | (19.7 | ) | | — |
| | 19.8 |
| | — |
| | — |
| | 0.1 |
|
Common stock dividends ($0.60 per
share) | — |
| | — |
| | — |
| | — |
| | — |
| | (92.5 | ) | | — |
| | — |
| | — |
| | (92.5 | ) |
Preferred stock dividends ($1.75 per
depositary share) | — |
| | — |
| | — |
| | — |
| | — |
| | (51.3 | ) | | — |
| | — |
| | — |
| | (51.3 | ) |
| December 31, 2014 | 29.3 |
| | $ | 731.3 |
| | 153.2 |
| | $ | 19.8 |
| | $ | 2,309.8 |
| | $ | (3,960.7 | ) | | $ | (285.7 | ) | | $ | (245.8 | ) | | $ | (303.0 | ) | | $ | (1,734.3 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | | | | | Cliffs Shareholders | | | | |
| | | Number
of
Depositary Shares | | Depositary
Shares | | Number
of
Common
Shares | | Common
Shares | | Capital in
Excess of
Par Value
of Shares | | Retained
Earnings | | Common
Shares
in
Treasury | | Accumulated
Other
Comprehensive
Income
(Loss) | | Non-
Controlling
Interest | | Total |
| January 1, 2015 | | 29.3 |
| | $ | 731.3 |
| | 153.2 |
| | $ | 19.8 |
| | $ | 2,309.8 |
| | $ | (3,960.7 | ) | | $ | (285.7 | ) | | $ | (245.8 | ) | | $ | (303.0 | ) | | $ | (1,734.3 | ) |
| Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | (749.3 | ) | | — |
| | — |
| | 0.9 |
| | (748.4 | ) |
| Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 227.8 |
| | (4.6 | ) | | 223.2 |
|
| Total comprehensive loss | | | | | | | | | | | | | | | | | | (3.7 | ) | | (525.2 | ) |
Capital contribution by noncontrolling
interest to subsidiary | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.2 |
| | 0.2 |
|
| Distributions to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.2 | ) | | (0.2 | ) |
| Distributions of partnership equity | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (51.7 | ) | | (51.7 | ) |
| Effect of deconsolidation | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 528.2 |
| | 528.2 |
|
| Stock and other incentive plans | | — |
| | — |
| | 0.3 |
| | — |
| | (10.9 | ) | | — |
| | 20.7 |
| | — |
| | — |
| | 9.8 |
|
Preferred Share dividends ($1.32 per
depositary share) | | — |
| | — |
| | — |
| | — |
| | — |
| | (38.4 | ) | | — |
| | — |
| | — |
| | (38.4 | ) |
| December 31, 2015 | | 29.3 |
| | $ | 731.3 |
| | 153.5 |
| | $ | 19.8 |
| | $ | 2,298.9 |
| | $ | (4,748.4 | ) | | $ | (265.0 | ) | | $ | (18.0 | ) | | $ | 169.8 |
| | $ | (1,811.6 | ) |
| Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 174.1 |
| | — |
| | — |
| | 25.2 |
| | 199.3 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3.3 | ) | | (0.5 | ) | | (3.8 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | 24.7 |
| | 195.5 |
|
| Preferred Share conversion | | (29.3 | ) | | (731.3 | ) | | 26.5 |
| | 3.5 |
| | 727.8 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Equity offering | | — |
| | — |
| | 44.4 |
| | 5.5 |
| | 281.9 |
| | — |
| | — |
| | — |
| | — |
| | 287.4 |
|
| Debt exchanges | | — |
| | — |
| | 8.2 |
| | 1.0 |
| | 44.2 |
| | — |
| | — |
| | — |
| | — |
| | 45.2 |
|
| Distributions to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3.2 | ) | | (3.2 | ) |
| Distributions of partnership equity | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (57.5 | ) | | (57.5 | ) |
| Stock and other incentive plans | | — |
| | — |
| | 0.5 |
| | — |
| | (5.8 | ) | | — |
| | 19.5 |
| | — |
| | — |
| | 13.7 |
|
| December 31, 2016 | | — |
| | $ | — |
| | 233.1 |
| | $ | 29.8 |
| | $ | 3,347.0 |
| | $ | (4,574.3 | ) | | $ | (245.5 | ) | | $ | (21.3 | ) | | $ | 133.8 |
| | $ | (1,330.5 | ) |
| Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | 367.0 |
| | — |
| | — |
| | (3.9 | ) | | 363.1 |
|
| Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4.0 | ) | | 1.1 |
| | (2.9 | ) |
| Total comprehensive income (loss) | | | | | | | | | | | | | | | | | | (2.8 | ) | | 360.2 |
|
| Issuance of convertible debt | | — |
| | — |
| | — |
| | — |
| | 83.4 |
| | — |
| | — |
| | — |
| | — |
| | 83.4 |
|
| Equity offering | | — |
| | — |
| | 63.3 |
| | 7.9 |
| | 653.4 |
| | — |
| | — |
| | — |
| | — |
| | 661.3 |
|
| Acquisition of noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | (70.2 | ) | | — |
| | — |
| | (18.9 | ) | | (15.9 | ) | | (105.0 | ) |
| Distribution of partnership equity | | — |
| | — |
| | — |
| | — |
| | (17.3 | ) | | — |
| | — |
| | 5.2 |
| | (116.7 | ) | | (128.8 | ) |
| Capital contributions by noncontrolling interest to subsidiary | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1.8 |
| | 1.8 |
|
| Stock and other incentive plans | | — |
| | — |
| | 1.0 |
| | — |
| | (62.4 | ) | | — |
| | 75.9 |
| | — |
| | — |
| | 13.5 |
|
| December 31, 2017 | | — |
| | $ | — |
| | 297.4 |
| | $ | 37.7 |
| | $ | 3,933.9 |
| | $ | (4,207.3 | ) | | $ | (169.6 | ) | | $ | (39.0 | ) | | $ | 0.2 |
| | $ | (444.1 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
Cliffs Natural ResourcesCleveland-Cliffs Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business Summary
Founded in 1847, we are the largest and oldest independent iron ore mining company in the United States. We are an international mining and natural resources company, a major globalsupplier of iron ore producerpellets to the North American steel industry from our mines and a producer of low-volatile metallurgical coal. In the U.S., we operate five iron ore minespellet plants located in Michigan and Minnesota, and two low-volatile metallurgical coal operations located in Alabama and West Virginia. In the fourth quarter of 2014,Minnesota. Additionally, we sold our CLCC assets, which consisted of two high-volatile metallurgical coal mines and one thermal coal mine. The sale was completed on December 31, 2014. As such, our results include the CLCC results through the day of the sale completion. As of December 31, 2014, our Asia Pacific operations consist solely of our Koolyanobbingoperate an iron ore mining complex in Western Australia. We also own two iron ore minesBy 2020, we expect to be the sole producer of HBI in Eastern Canada. In the Great Lakes region with the development of our first quarter of 2014, Wabush Scully mineproduction plant in Newfoundland and Labrador was idled and subsequently moved to permanent closure during the fourth quarter. In December 2014, iron ore production at the Bloom Lake mine was suspended and the Bloom Lake mine was placed in ‘‘care-and-maintenance’’ mode. Our operations are organized according to product category and geographic location: U.S. Iron Ore, Asia Pacific Iron Ore, North American Coal and Eastern Canadian Iron Ore.Toledo, Ohio.
Significant Accounting Policies
We consider the following policies to be beneficial in understanding the judgments that are involved in the preparation of our consolidated financial statements and the uncertainties that could impact our financial condition, results of operations and cash flows.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relatedrelate to mineral reserves future realizable cash flow; environmental, reclamation and closure obligations; valuation of long-lived assets and investments;assets; valuation of inventory; valuation of post-employment, post-retirement and other employee benefit liabilities; valuation of tax assets; reserves for contingencies and litigation; the fair value of derivative instruments; and the fair value of derivative instruments.loans to and accounts receivable from Canadian entities. Actual results could differ from estimates. On an ongoing basis, management reviews estimates. Changes in facts and circumstances may alter such estimates and affect the results of operations and financial position in future periods.
Basis of Consolidation
The consolidated financial statements include our accounts and the accounts of our wholly owned and majority-owned subsidiaries, including the following operations at December 31, 2014:2017:
|
| | | | | | | | |
| Name | | Location | | Ownership Interest | | Operation | | Status of Operations |
| Northshore | | Minnesota | | 100.0% | | Iron Ore | | Active |
| United Taconite | | Minnesota | | 100.0% | | Iron Ore | | Active |
Tilden1 | | Michigan | | 85.0%100.0% | | Iron Ore | | Active |
Empire1 | | Michigan | | 79.0%100.0% | | Iron Ore | | ActiveIndefinitely Idled |
| Koolyanobbing | | Western Australia | | 100.0% | | Iron Ore | | Active |
Pinnacle | | West Virginia | | 100.0% | | Coal | | Active |
Oak Grove | | Alabama | | 100.0% | | Coal | | Active |
CLCC | | West Virginia | | 100.0% | | Coal | | Assets sold as of December 31, 2014 |
Wabush | | Newfoundland1During 2017, our ownership interest in Tilden and Labrador/ Québec, Canada | | 100.0% | | Iron Ore | | Permanent closure |
Bloom Lake | | Québec, Canada | | 82.8% | | Iron Ore | | Care-and-maintenance |
Cliffs Chromite Ontario - Black Label Deposit | | Ontario, Canada | | 100.0% | | Chromite | | Suspended |
Cliffs Chromite Ontario - Black Thor Deposit | | Ontario, Canada | | 100.0% | | Chromite | | Suspended |
Cliffs Chromite Ontario & Cliffs Chromite Far North - Big Daddy Deposit | | Ontario, Canada | | 70.0% | | Chromite | | SuspendedEmpire changed. Refer to the Noncontrolling Interests section below for additional information. |
Intercompany transactions and balances are eliminated upon consolidation.
Equity Method Investments
Investments in unconsolidated ventures that we have the ability to exercise significant influence over, but not control, are accounted for under the equity method.
Our 23% ownership interest in Hibbing is recorded as an equity method investment. As of December 31, 2017 and 2016, our investment in Hibbing was $11.0 million and $8.7 million, respectively, classified in Other liabilities in the Statements of Consolidated Financial Position.
Our share of equity income (loss) is eliminated against consolidated product inventory upon production, and against Cost of goods sold and operating expenses when sold. This effectively reduces our cost for our share of the mining ventures' production cost, reflecting the cost-based nature of our participation in unconsolidated ventures.
Noncontrolling Interests
During the fourth quarter of 2013, CQIM’s2017, our ownership interest in Bloom LakeEmpire increased byto 100% as we reached an aggregateagreement to distribute the noncontrolling interest net assets of 7.8 percent after CQIM$132.7 million to ArcelorMittal, in exchange for its interest in Empire. The parties agreed that the net assets were to be distributed in three installments of $44.2 million each, the first of which was paid both its own and WISCO’s proportionate sharesupon the execution of the cash call foragreement and the remaining distributions are due in August 2018 and August 2019. Upon payment of the first half of 2013. As a result ofinstallment, we assumed ArcelorMittal's 21% interest and have reflected this ownership percentage change in our cash call payments, CQIM was issued a total of 457,556 new Bloom Lake units, increasing our interest to 82.8 percent in Bloom Lake and diluting WISCO’s interest to17.2 percent. The new unit issuance decreased equity attributable to WISCO by $314.8 million for the year ended December 31, 2013 by decreasing WISCO’s interest in Bloom Lake’s accumulated deficit.consolidated financial statements. We accounted for the increase in ownership as an equity transaction, which resulted in a $314.8net $12.1 million increase todecrease in equity attributable to Cliffs’ shareholders.
Immaterial Error
In connection with our acquisition of Consolidated ThompsonCliffs' shareholders and a $116.7 million decrease in May 2011, the Company acquired a 75 percent controlling interest in Bloom Lake. For financial reporting purposes, the Company fully consolidates Bloom Lake in the accompanying financial statements and allocates a portion of its consolidated results of operations and shareholders’ equity, which is reported as Loss attributable to noncontrolling interest in the Statements of Consolidated Operations and Noncontrolling interest in the Statements of Consolidated Financial Position.
As a result of the application of ASC 805, Business Combinations, we allocated the purchase price to the assets, liabilities. The net loss and noncontrolling interest at the acquisition date of May 11, 2011 based on their fair values. These fair value adjustments were recorded in the opening balance sheet and consolidated results of operations; however, subsequent effects of the amortization of these fair value adjustments were not allocatedincome attributable to the noncontrolling interest.
In accordance with U.S. GAAP, management has quantitatively and qualitatively evaluated the materialityinterest of the errorEmpire mining venture was $3.9 million and has determined that the misstatement was immaterial to the interim and annual financial statements previously filed from June 30, 2011 through December 31, 2013. Accordingly, the adjustment was recorded prospectively in the Statements of Consolidated Operations$25.2 million for the periodyears ended December 31, 20132017 and 2016, respectively.
During 2017, we also acquired the remaining 15% equity interest in Tilden owned by U.S. Steel for $105.0 million. With the closing of this transaction, we now have 100% ownership of the mine. We accounted for the increase in ownership as an equity transaction, which resulted in an $89.1 million decrease in equity attributable to Cliffs' shareholders and a $15.9 million decrease in Noncontrolling interest.
Noncontrolling interest is also comprised of the 17.2% noncontrolling interest in the StatementsBloom Lake operations, through the CCAA filing on January 27, 2015. Financial results prior to the deconsolidation of Consolidated Financial Position as of December 31, 2013. The adjustmentthe Bloom Lake Group and subsequent expenses directly associated with the Canadian Entities are included in our financial statements. There was no net income or loss attributable to the noncontrolling interest related to Bloom Lake was approximately $45.1 million and resulted in an increase to Net Income (Loss) Attributable to Cliffs Shareholders and a
reduction of Loss attributable to noncontrolling interest and corresponding decrease to Noncontrolling interest in the Statements of Consolidated Financial Position for the year end and as of December 31, 2013. The adjustments also resulted in an increase to basic and diluted earnings per common share of $0.30 and $0.26, respectively, for the year ended December 31, 2013. No other financial statement line items were impacted by this adjustment. The prior period amounts included within the accompanying Consolidated Financial Statements have not been retrospectively adjusted for this impact due to management's materiality assessment as discussed above. The impact of the prospective adjustments in the Statements of Consolidated Operations would have resulted in an increase to basic and diluted earnings per common share of $0.25 and $0.07 for the years ended December 31, 20122017 and 2011, respectively.2016. See NOTE 14 - DISCONTINUED OPERATIONS for further information.
Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit as well as all short-term securities held for the primary purpose of general liquidity. We consider investments in highly liquid debt instruments with an original maturity of three months or less from the date of acquisition and longer maturities when funds can be withdrawn in three months or less without a significant penalty to be cash equivalents. We routinely monitor and evaluate counterparty credit risk related to the financial institutions byin which our short-term investment securities are held.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in Cliffs'our existing accounts receivable. We establish provisions for losses on accounts receivable when it is probable that all or part of the outstanding balance will not be collected. We regularly review our accounts receivable balances and establish or adjust the allowance as necessary using the specific identification method. TheThere was no allowance for doubtful accounts was $8.1 million at December 31, 20142017 and 2013. There was $9.0 million of bad debt expense for the year ended December 31, 2012. There was2016and no bad debt expense for the years ended December 31, 20142017 and 2013.2016. There was $7.1 million bad debt expense for the year ended December 31, 2015.
Inventories
U.S. Iron Ore
U.S. Iron Ore product inventories are stated at the lower of cost or market. Cost of iron ore inventories is determined using the LIFO method.
We had approximately 1.41.5 million tons and 1.2 millionlong tons of finished goods stored at ports and customer facilities on the lower Great Lakes to service customers at December 31, 20142017 and 2013, respectively.2016. We maintain ownership of the inventories until title has transferred to the customer, usually when payment is received. Maintaining ownership of the iron ore products at ports on the lower Great Lakes reduces risk of non-payment by customers.
Asia Pacific Iron Ore
Asia Pacific Iron Ore product inventories are stated at the lower of cost or market. Costs ofnet realizable value. Iron ore inventories are being valued on a weighted average cost basis. We maintain ownership of the inventories until title has transferred to the customer, which generally is when the product is loaded into the vessel.
North American Coal
North American Coal product inventories are stated at the lower of cost or market. Cost of coal inventories is calculated using the weighted average cost. We maintain ownership until coal is loaded into rail cars at the mine for domestic sales and until loaded in the vessels at the terminal for export sales.
Eastern Canadian Iron Ore
Iron ore pellet inventories are stated at the lower of cost or market. Cost is determined using the LIFO method. We maintain ownership of the inventories until title has transferred to the customer, which is generally when the product is loaded into the vessel.
Iron ore concentrate inventories are stated at the lower of cost or market. The cost of iron ore concentrate inventories is determined using weighted average cost. We maintain ownership of the inventories until title has transferred to the customer, which generally is when the product is loaded into the vessel.
Supplies and Other Inventories
Supply inventories include replacement parts, fuel, chemicals and other general supplies, which are expected to be used or consumed in normal operations. Supply inventories also include critical spares. Critical spares are replacement parts for equipment that is critical for the continued operation of the mine or processing facilities.
Supply inventories are stated at the lower of cost or marketnet realizable value using average cost, less an allowance for obsolete and surplus items. The allowance for obsolete and surplus items was $68.2$16.0 million and $63.4$14.0 million at December 31, 20142017 and 2013,2016, respectively.
Derivative Financial Instruments and Hedging Activities
We are exposed to certain risks related to the ongoing operations of our business, including those caused by changes in commodity prices, interest rates and foreign currency exchange rates. We have established policies and procedures, including the use of certain derivative instruments, to manage such risks.risks, if deemed necessary.
Derivative financial instruments are recognized as either assets or liabilities in the Statements of Consolidated Financial Position and measured at fair value. On the date a derivative instrument is entered into, we generally designate a qualifying derivative instrument as a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability or forecasted transaction (cash flow hedge). We formally document all relationships between hedging instruments and hedged items, as well as itsour risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to specific firm commitments or forecasted transactions. We also formally assess both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the related hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively and record all future changes in fair value in the period of the instrument's earnings or losses. The policy allows for not more than 75 percent, but not less than 40 percent for up to 12 months and not less than 10 percent for up to 15 months, of forecasted net currency exposures that are probable to occur.
For derivative instruments that have been designated as cash flow hedges, the effective portion of the changes in fair value are recorded in accumulatedAccumulated other comprehensive income (loss) and any portion that is ineffective is recorded in current period earnings or losses.loss. Amounts recorded in accumulatedAccumulated other comprehensive income (loss)loss are reclassified to earnings or losses in the period the underlying hedged transaction affects earnings or when the underlying hedged transaction is no longer reasonably possible of occurring.
For derivative instruments that have not been designated as cash flow hedges, changes in fair value are recorded in the period of the instrument's earnings or losses.
Refer to Revenue Recognition below for discussion of derivatives recorded as a result of pricing terms in our sales contracts.
Refer to NOTE 13 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
Property, Plant and Equipment
Our properties are stated at the lower of cost less accumulated depreciation or fair value. Depreciation of plant and equipment is computed principally by the straight-line method based on estimated useful lives, not to exceed the mine lives. Depreciation continues to be recognized when operations are idled temporarily. The Northshore, United Taconite, Empire, Tilden and WabushU.S. Iron Ore operations use the double-declining balance method of depreciation for certain mining equipment. The Asia Pacific Iron Ore operation uses the production output method for certain mining equipment. Depreciation is provided over the following estimated useful lives:
|
| | | | |
| Asset Class | | Basis | | Life |
| Office and information technology | | Straight line | | 3 to 15 Years |
| Buildings | | Straight line | | 45 Years |
| Mining equipment | | Straight line/Double declining balance | | 3 to 20 Years |
| Processing equipment | | Straight line | | 10 to 45 Years |
| Electric power facilities | | Straight line | | 10 to 45 years |
| Land improvements | | Straight line | | 20 to 45 years |
Office and information technologyAsset retirement obligation | | Straight line | | 3 to 15 YearsLife of mine |
Depreciation continues to be recognized when operations temporarily are idled.
Our Asia Pacific Iron Ore, Bloom Lake, Wabush, and United Taconite operations' interests in iron ore reserves and mineralized materials were valued when acquired using a discounted cash flow method. The fair value was estimated based upon the present value of the expected future cash flows from iron ore operations over the economic lives of the respective mines.
Our North American Coal operation leases coal mining rights from third parties through lease agreements. The lease agreements are for varying terms and extend through the earlier of their lease termination date or until all merchantable and mineable coal has been extracted. Our interest in coal reserves and non-reserve coal was valued when acquired using a discounted cash flow method. The fair value was estimated based upon the present value of the expected future cash flows from coal operations over the life of the reserves acquired.
Refer to NOTE 4 - PROPERTY, PLANT AND EQUIPMENT for further information.
Capitalized Stripping Costs
During the development phase, stripping costs are capitalized as a part of the depreciable cost of building, developing and constructing a mine. These capitalized costs are amortized over the productive life of the mine using the units of production method. The production phase does not commence until the removal of more than a de minimis amount of saleable mineral material occurs in conjunction with the removal of overburden or waste material for purposes of obtaining access to an ore body. The stripping costs incurred in the production phase of a mine are variable production costs included in the costs of the inventory produced (extracted) during the period that the stripping costs are incurred.
Stripping costs related to expansion of a mining asset of proven and probable reserves are variable production costs that are included in the costs of the inventory produced during the period that the stripping costs are incurred.
Equity Method Investments
Investments in unconsolidated ventures that we have the ability to exercise significant influence over, but not control, are accounted for under the equity method. The following table presents the detail of our investments in unconsolidated ventures and where those investments are classified in the Statements of Consolidated Financial Position as of December 31, 2014 and December 31, 2013. Parentheses indicate a net liability.
|
| | | | | | | | | | | | | | |
| | | | | | | | | (In Millions) |
| Investment | | Classification | | Accounting Method | | Ownership Interest | | December 31,
2014 | | December 31, 2013 |
| Hibbing | | Other non-current assets 1 | | Equity Method | | 23% | | $ | 3.1 |
| | (3.9 | ) |
| Other | | Other non-current assets | | Equity Method | | Various | | 3.9 |
| | 34.7 |
|
| | | | | | | | | $ | 7.0 |
| | $ | 30.8 |
|
1 At December 31, 2013, the classification for Hibbing was Other liabilities.
During the year ended December 31, 2014, an impairment charge of $21.5 million was recorded related to joint ventures investments and is recognized in Impairment of goodwill and other long-lived assets in the Statements of Consolidated Operations.
Hibbing
Our share of equity income (loss) is eliminated against consolidated product inventory upon production, and against Cost of goods sold and operating expenses when sold. This effectively reduces our cost for our share of the mining ventures' production cost, reflecting the cost-based nature of our participation in unconsolidated ventures.
Amapá
On December 27, 2012, our Board of Directors authorized the sale of our 30 percent interest in Amapá. Per this original agreement, together with Anglo, we were to sell our respective interest in a 100 percent sale transaction to Zamin. The carrying value of our investment was in excess of the net proceeds expected from the sale, which approximated fair value, resulting in a $365.4 million impairment charge, which was recorded through Equity loss from ventures, net of tax in the Statements of Consolidated Operations for the year ended December 31, 2012.
On March 28, 2013, an unknown event caused the Santana port shiploader to collapse into the Amazon River, preventing further ship loading by the mine operator, Anglo. In light of the March 28, 2013 collapse of the Santana port shiploader and subsequent evaluation of the effect that this event had on the carrying value of our investment in Amapá as of June 30, 2013, we recorded an impairment charge of $67.6 million in the second quarter of 2013.
On August 28, 2013, we entered into additional agreements to sell our 30 percent interest in Amapá to Anglo for nominal cash consideration, plus the right to certain contingent deferred consideration upon the two-year anniversary of the closing. The closing was conditional on obtaining certain regulatory approvals and the additional agreement provided Anglo with an option to request that we transfer our interest in Amapá directly to Zamin. Anglo exercised this option and the transfer to Zamin was completed in the fourth quarter of 2013.
Cockatoo Island
On July 31, 2012, we entered into a definitive asset sale agreement with our joint venture partner, HWE Cockatoo Pty Ltd., to sell our beneficial interest in the mining tenements and certain infrastructure of Cockatoo Island to Pluton Resources, which was amended on August 31, 2012. On September 7, 2012, the closing date, Pluton Resources paid a nominal sum of AUD $4.00 and assumed ownership of the assets and responsibility for the environmental rehabilitation obligations and other assumed liabilities not inherently attached to the tenements acquired. The rehabilitation obligations and assumed liabilities that are inherently attached to the tenements were transferred to Pluton Resources upon registration by the Department of Mining and Petroleum denoting Pluton Resources as the tenement holder. Upon final settlement of the sale, which was completed during the second quarter of 2013, we extinguished approximately $18.6 million related to the estimated cost of the rehabilitation.
Goodwill
Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies. We had goodwill of $2.0 million and $74.5 million recorded in the Statements of Consolidated Financial Position at December 31, 2014 and 2013, respectively. In accordance with the provisions of ASC 350, we compare the fair value of the respective reporting unit to its carrying value on an annual basis (or more frequently if necessary as discussed below) to determine if there is potential goodwill impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied value of the goodwill within the reporting unit is less than the carrying value of its goodwill.
During the third quarter of 2014, a goodwill impairment charge of $73.5 million was recorded for our Asia Pacific Iron Ore reporting unit within the Asia Pacific Iron Ore operating segment. The impairment charge was a result of downward long-term pricing estimates as determined through management's long-range planning process.
After performing our annual goodwill impairment test in the fourth quarter of 2013, we determined that $80.9 million of goodwill associated with our Ferroalloys operating segment was impaired. The impairment charge was primarily a result of the decision made in the fourth quarter of 2013 to indefinitely suspend the Chromite Project and to not allocate additional capital for the project given the uncertain timeline and risks associated with the development of necessary infrastructure to bring the project online.
During the fourth quarter of 2012, upon performing our annual goodwill impairment test, a goodwill impairment charge of $997.3 million was recorded for our CQIM reporting unit within the Eastern Canadian Iron Ore operating segment. The impairment charge for our CQIM reporting unit was driven by the project’s lower than anticipated long-term profitability coupled with delays in achieving full operational capacity and higher capital and operating costs. Additionally, the announced delay of the Phase II expansion of the Bloom Lake mine also contributed to the impairment.
Refer to NOTE 12 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES and NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.
Other Intangible Assets and Liabilities
Other intangible assets are subject to periodic amortization on a straight-line basis over their estimated useful lives as follows:
|
| | | | |
| Intangible Assets | | Basis | | Useful Life (years) |
Permits - Asia Pacific Iron Ore | | Units of production | | Life of mine |
Permits - All OtherUSIO | | Straight line | | 15 - 40 |
Utility Contracts | | Straight line | | 5 |
Leases - North American Coal
| | Units of production | | Life of mine |
Leases - All Other
| | Straight line | | 4.5 - 17.5 |
Asset Impairment
Long-Lived Tangible and Intangible Assets
We monitor conditions that may affect the carrying value of our long-lived tangible and intangible assets when events and circumstances indicate that the carrying value of the asset groups may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available ("asset group"). An impairment loss exists when projected undiscounted cash flows are less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market approach, income approach or cost approach.
As a result of these assessments during 2014, we determinedFor the years ended December 31, 2017 and 2015, although certain factors indicated that the cash flows associated with our Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal and Ferroalloys asset groups were not sufficient to support the recoverability of the carrying value of these productive assets. Accordingly, during 2014, we recorded a long-lived tangiblecertain asset groups may not be recoverable, an assessment for the potential impairment charge of $8,839.0 millionwas performed and an intangible asset impairment charge of $15.5 million in our Statements of Consolidated Operations. At December 31, 2013, we determinedadjustment was not required. During 2016, there were long-lived tangible and intangible asset impairments related to the Wabush operations within our Eastern Canadian Iron Ore operating segment that resulted inno impairment charges of $145.1 million and $9.5 million, respectively. At December 31, 2012, we determined there wasindicators present; as a long-lived assetresult, no impairment related to the Wabush mine's pelletizing operations that resulted in an impairment charge of $49.9 million.assessments were required.
Refer to NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NOTE 12 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES and NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.
Fair Value Measurements
Valuation Hierarchy
ASC 820,Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own assumptionsviews about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized below:
Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety. Valuation methodologies used for assets and liabilities measured at fair value are as follows:
Cash Equivalents
Where quoted prices are available in an active market, cash equivalents are classified within Level 1 of the valuation hierarchy. Cash equivalents classified in Level 1 at December 31, 2014 and 2013 include money market funds.funds and treasury bonds. Valuation of these instruments is determined using a market approach and is based upon unadjusted quoted prices for identical assets in active markets.
Marketable Securities
Where quoted prices are available in an active market, marketable securities are classified within Level 1 of the valuation hierarchy. Marketable securities Cash equivalents classified in Level 1 at December 31, 20142 include commercial paper and 2013 include available-for-sale securities. The valuationcertificates of deposit. Valuation of these instruments is determined using afinancial models that use as their basis readily observable market approach and is based upon unadjusted quoted prices for identical assets in active markets.parameters.
Derivative Financial Instruments
Derivative financial instruments valued using financial models that use as their basis readily observable market parameters are classified within Level 2 of the valuation hierarchy. Such derivative financial instruments include substantially all of our foreign currency exchange contracts and derivative financial instruments that are valued based upon published pricing settlements realized by other companies in the industry.commodity hedging instruments. Derivative financial instruments that are valued based upon models with significant unobservable market parameters and are normally traded less actively, are classified within Level 3 of the valuation hierarchy.
Refer to NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS and NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
Pensions and Other Postretirement Benefits
We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit plans, primarily consisting of retiree healthcare benefits, to most employees in North America as part of a total compensation and benefits program. We do not have employee pension or post-retirement benefit obligations at our Asia Pacific Iron Ore operations or our Bloom Lake mine operations within our Eastern Canadian Iron Ore segment.operations.
We recognize the funded or unfunded status of our postretirement benefit obligations on our December 31, 20142017 and 20132016 Statements of Consolidated Financial Position based on the difference between the market value of plan assets and the actuarial present value of our retirement obligations on that date, on a plan-by-plan basis. If the plan assets exceed the retirement obligations, the amount of the surplus is recorded as an asset; if the retirement obligations exceed the plan assets, the amount of the underfunded obligations areis recorded as a liability. Year-end balance sheet adjustments to postretirement assets and obligations are recorded as Accumulated other comprehensive loss. in the Statements of Consolidated Financial Position.
The actuarial estimates of the PBO and APBO retirement obligations incorporate various assumptions including the discount rates, the rates of increases in compensation, healthcare cost trend rates, mortality, retirement timing and employee turnover. For the U.S. and Canadian plans, theThe discount rate is determined based on the prevailing year-end rates for high-grade corporate bonds with a duration matching the expected cash flow timing of the benefit payments from the various plans. The remaining assumptions are based on our estimates of future events by incorporating historical trends and future expectations. The amount of net periodic cost that is recorded in the Statements of Consolidated Operations consists of several components including service cost, interest cost, expected return on plan assets, and amortization of previously unrecognized amounts. Service cost represents the value of the benefits earned in the current year by the participants. Interest cost represents the cost associated with the passage of time. Certain items, such as plan amendments, gains and/or losses resulting from differences between actual and assumed results for demographic and economic factors affecting the obligations and assets of the plans, and changes in other assumptions are subject to deferred recognition for income and expense purposes. The expected return on plan assets is determined utilizing the weighted average of expected returns for plan asset investments in various asset categories based on historical performance, adjusted for current trends. See NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
Asset Retirement Obligations
Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The fair value of the liability is determined as the discounted value of the expected future cash flow.flows. The asset retirement obligation is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized as part of the asset’s carrying value and amortized over the life of the related asset. Reclamation costs are adjusted periodically to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. We review, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site in accordance with the provisions of ASC 410.410, Asset Retirement and Environmental Obligations. We perform an in-depth evaluation of the liability every three years in addition to our routine annual assessments. In 2017, we employed a third-party specialist to assist in the evaluation.
Future remediationreclamation costs for inactive mines are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised. See NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Environmental Remediation Costs
We have a formal policy for environmental protection and restoration. Our mining and exploration activities are subject to various laws and regulations governing protection of the environment. We conduct our operations to protect the public health and environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our environmental liabilities, including obligations for known environmental remediation exposures at active and closed mining operations and other sites, have been recognized based on the estimated cost of investigation and remediation at each site. If the cost can only can be estimated as a range of possible amounts with no point in the range being more likely, the minimum of the range is accrued. Future expenditures are not discounted unless the amount and timing of the cash disbursements reasonably can be estimated. It is possible that additional environmental obligations could be incurred, the extent of which cannot be assessed. Potential insurance recoveries have not been reflected in the determination of the liabilities. See NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Revenue Recognition
U.S. Iron Ore, Asia Pacific Iron Ore and Eastern Canadian Iron Ore
We sell our products pursuant to comprehensive supply agreements negotiated and executed with our customers. Revenue is recognized from a sale when persuasive evidence of an arrangement exists, the price is fixed or determinable, the product is delivered in accordance with F.O.B.shipping terms, title and risk of loss have transferred to the customer in accordance with the specified provisions of each supply agreement and collection of the sales price reasonably is assured. Our U.S. Iron Ore and Asia Pacific Iron Ore and Eastern Canadian Iron Ore supply agreements provide that title and risk of loss transfer to the customer either upon loading of the vessel, shipment or, as is the case with some of our U.S. Iron Ore supply agreements, when payment is received. Under certain term supply agreements, we ship the product to ports on the lower Great Lakes or to the customers’ facilities prior to the transfer of title. Our rationale for shipping iron ore products to certain customers and retaining title until payment is received for these products is to minimize credit risk exposure.
Iron ore salesSales are recorded at a sales price specified in the relevant supply agreements resulting in revenue and a receivable at the time of sale. The majority of our contracts have pricing mechanisms that require price estimation at the time of delivery with price finalization at a future period. Upon revenue recognition for provisionally priced sales, a freestanding derivative is created for the difference between the sales price used and expected future settlement price. The derivative which does not qualify for hedge accounting, is adjusted to fair value through Product revenues as a revenue adjustment each reporting period based upon current market data and forward-looking estimates determined by management until the final sales price is determined. The principal risks associated with recognition of sales on a provisional basis include iron ore price, index pellet premiums and index freight fluctuations between the date initially recorded and the date of final settlement. For revenue recognition, we estimate the future settlement rate; however, if significant changes in iron ore pricesinputs occur between the provisional pricing date and the final settlement date, we might be required to either return a portion of the sales proceeds received or bill for the additional sales proceeds due based on the provisional sales price. Refer to NOTE 13 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
In addition, certain supply agreements with one customer include provisions for supplemental revenue or refunds based on the customer’scustomer's average annual steel pricing or an average annual daily market price for hot-rolled coil steel the year the product is consumed in the customer’s blast furnaces. We account for this provision as a free standing derivative instrument at the time of sale and record this provision at fair value until the year the product is consumed and the amounts are settled as an adjustment to revenue.Product revenues. Refer to NOTE 13 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
Revenue from product sales and services also includes reimbursement for freight charges associated with domestic freight and venture partner cost reimbursements for the U.S. Iron Ore operations and freight associated with CFR based shipments paid on behalf of customers and freight costs to move product fromfor the Upper Great Lakes to ports in Québec to use for exports and from the port of Esperance to ports in China, whichAsia Pacific Iron Ore operations. These are included in Freight and venture partners' cost reimbursements separate from Product revenues. Revenue is recognized for the expected reimbursement of services when the services are performed.
North American Coal
We sell our products pursuant to supply agreements negotiated and executed with our customers. Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, the product is delivered in accordance with F.O.B. terms, title and risk of loss have transferred to the customer in accordance with the specified provisions of each supply agreement and collection of the sales price reasonably is assured. Delivery on our coal sales is determined to be complete for revenue recognition purposes when title and risk of loss has passed to the customer in accordance with stated contractual terms and there are no other future obligations related to the shipment. For domestic shipments, title and risk of loss generally passes as the coal is loaded into transport carriers for delivery to the customer. For international shipments, title generally passes at the time coal is loaded onto the shipping vessel. Revenue from product sales in 2014, 2013 and 2012 included reimbursement for freight charges paid to move coal from the mine to port locations of $115.0 million, $85.8 million and $101.0 million, respectively, and is recorded in Freight and venture partners' cost reimbursements on the Statements of Consolidated Operations.
Deferred Revenue
The terms of one of our U.S. Iron Ore pellet supply agreements required supplemental payments to be paid by the customer during the period 2009 through 2012, with the option to defer a portion of the 2009 monthly amount in exchange for interest payments until the deferred amount was repaid in 2013. Installment amounts received under this arrangement in excess of sales arewere classified as deferred revenue in the Statements of Consolidated Financial Position upon receipt of payment. Revenue is recognized over the life of the supply agreement, which extends until 2022, in equal annual installments. As of December 31, 20142017 and 2013,2016, installment amounts received in excess of sales totaled $102.8$64.2 million and $115.6$77.1 million, respectively. As of December 31, 2014,2017, deferred revenue of $12.8 million was recorded in Other current liabilities and $90.0$51.4 million was recorded as long termlong-term in Other liabilities in the Statements of Consolidated Financial Position.Position, related to this agreement. As of December 31, 2013,2016, deferred revenue of $12.8 million was recorded in Other current liabilities and $102.8$64.3 million was recorded as long termlong-term in Other liabilities in the Statements of Consolidated Financial Position.Position, related to this agreement.
In 20142017 and 2013,2016, due to the payment terms and the timing of cash receipts near year-end, cash receipts exceeded shipments. The shipments were completed early in the subsequent years. We considered whether revenue should be recognized on these sales under the “bill and hold” guidance provided by the SEC Staff; however, based upon the assessment performed, revenuefor certain customers. Revenue recognition on these transactions totaling $29.3$9.6 million and $13.5$3.4 million respectively, was deferred on the December 31, 2014 and December 31, 2013 Statements of Consolidated Financial Position.Position for the years ended December 31, 2017 and 2016, respectively.
Cost of Goods Sold
U.S. Iron Ore, Asia Pacific Iron Ore and Eastern Canadian Iron Ore
Cost of goods sold and operating expenses represents all direct and indirect costs and expenses applicable to the sales and revenues offrom our mining operations. Operating expenses primarily represent the portion of the Tilden mining venture costs for which we do not own;prior to our 100% ownership; that is, the costs attributable to the share of the mine’s production owned by the other joint venture partner in the Tilden mine.mine until we acquired the remaining 15% noncontrolling interest during 2017. The mining venture functionsfunctioned as a captive cost company; it suppliescompany, supplying product only to its owners effectively for the cost of production. Accordingly, the noncontrolling interests’ revenue amounts are stated at cost of production and are offset by an equal amount included in Cost of goods sold and operating expenses resulting in no sales margin reflected for the noncontrolling partner participant. As we arewere responsible for product fulfillment under the venture, we actacted as a principal in the transaction and, accordingly, recordrecorded revenue under these arrangements on a gross basis.
The following table is a summary of reimbursements in our U.S. Iron Ore operations for the years ended December 31, 2014, 20132017, 2016 and 2012:2015:
| | | | | (In Millions) | | (In Millions) |
| | | Year Ended December 31, | | Year Ended December 31, |
| | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Reimbursements for: | | | | | | | | | | | | |
| Freight | | $ | 163.0 |
| | $ | 177.3 |
| | $ | 142.0 |
| | $ | 166.7 |
| | $ | 106.8 |
| | $ | 105.3 |
|
| Venture partners’ cost | | 108.0 |
| | 82.2 |
| | 108.8 |
| | 54.7 |
| | 68.0 |
| | 52.0 |
|
| Total reimbursements | | $ | 271.0 |
| | $ | 259.5 |
| | $ | 250.8 |
| | $ | 221.4 |
| | $ | 174.8 |
| | $ | 157.3 |
|
In 2014, we began sellingWe sell a portion of itsour Asia Pacific Iron Ore product on a CFR basis. As a result, $6.9$19.6 million, $20.7 million and $23.6 million of freight was included in Cost of goods sold and operating expenses. There was no freight for the yearyears ended December 31, 2013.2017, 2016 and 2015, respectively.
Where we have joint ownership of a mine, such as Hibbing and up to the point at which we purchased the remaining interest in Tilden, our contracts entitle us to receive royalties and/or management fees or royalties, which we earn as the pellets are produced.
North American Coal
Cost of goods sold and operating expenses represent all direct and indirect costs and expenses applicable to the sales and revenues of our mining operations.
Repairs and Maintenance
Repairs, maintenance and replacement of components are expensed as incurred. The cost of major equipment overhauls is capitalized and depreciated over the estimated useful life, which is the period until the next scheduled overhaul, generally five years. All other planned and unplanned repairs and maintenance costs are expensed when incurred.
Share-Based Compensation
The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. Consistent with the guidelines of ASC 718,Stock Compensation, a correlation matrix of historic and projected stock prices was developed for both the Company and its predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved.
The expected term of the grant represents the time from the grant date to the end of the service period for each of the three plan-year agreements. We estimated the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance plans.
The fair value of stock options is estimated on the date of grant using a Black-Scholes model using the grant date price of our common shares and option exercise price, and assumptions regarding the option’s expected term, the volatility of our common shares, the risk-free interest rate, and the dividend yield over the option’s expected term.
Upon vesting of share-based compensation awards, we issue shares from treasury shares before issuing new shares. Forfeitures are recognized when they occur.
Refer to NOTE 8 - STOCK COMPENSATION PLANS for additional information.
Income Taxes
Income taxes are based on income for financial reporting purposes, calculated using tax rates by jurisdiction, and reflect a current tax liability or asset for the estimated taxes payable or recoverable on the current year tax return and expected annual changes in deferred taxes. Any interest or penalties on income tax are recognized as a component of income tax expense.
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial results of operations.
Accounting for uncertainty in income taxes recognized in the financial statements requires that a tax benefit from an uncertain tax position be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on technical merits.
See NOTE 9 - INCOME TAXES for further information.
Discontinued Operations
On July 10, 2012,North American Coal Operations
As we entered into a definitive share executed our strategy to focus on strengthening our U.S. Iron Ore operations, management determined as of March 31, 2015 that our North American Coal operating segment met the criteria to be classified as held for sale under ASC 205, Presentation of Financial Statements and assetcontinued to meet the criteria throughout 2015. In December 2015, we completed the sale agreementof our remaining two metallurgical coal operations, Oak Grove and Pinnacle mines, which marked our exit from the coal business. Our plan to sell our 45 percent economic interest in the Sonoma joint venture coalOak Grove and Pinnacle mine located in Queensland, Australia. Upon completion of the transaction on November 12, 2012, we collected approximately AUD $141.0 million in net cash proceeds. The assets sold included our interests in the Sonoma mine along with our ownership of the affiliated washplant. The Sonoma operations previously were included in Other within our reportable segments.
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. The standard requires that an entity report as a discontinued operation only a disposal that representsrepresented a strategic shift in operations that has a major effect on its operations and financial results. ASU 2014-08 is effective prospectivelyour business. For this reason, our previously reported North American Coal operating segment results for new disposals that occur within annualall periods, beginning on or after December 15, 2014. Early adoption is permitted and we adopted ASU 2014-08 duringprior to the three months ended DecemberMarch 31, 2014. Both Wabush and CLCC did not qualify2015 held for sale determination, as discontinued operationswell as determined under the new guidance. Neither the closure of Wabush nor the sale of the CLCC assets was considered a strategic shift in operations that had a major effect on ourcosts to exit are classified as discontinued operations. Refer to NOTE 14 - DISCONTINUED OPERATIONS for further discussion of our adoptiondiscontinued operations.
Canadian Operations
As more fully described in NOTE 14 - DISCONTINUED OPERATIONS, in January 2015, we announced that the Bloom Lake Group commenced restructuring proceedings in Montreal, Quebec under the CCAA. At that time, we had suspended Bloom Lake operations and for several months had been exploring options to sell certain of ASU 2014-08.our Canadian assets, among other initiatives. Effective January 27, 2015, following the commencement of CCAA proceedings for the Bloom Lake Group, we deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries comprising substantially all of our Canadian operations. Additionally, on May 20, 2015, the Wabush Group commenced restructuring proceedings in Montreal, Quebec under the CCAA which resulted in the deconsolidation of the remaining Wabush Group entities that were not previously deconsolidated. The Wabush Group was no longer generating revenues and was not able to meet its obligations as they came due. As a result of this action, the CCAA protection granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate the reorganization of each of their businesses and operations. Our Canadian exit represents a strategic shift in our business. For this reason, our previously reported Eastern Canadian Iron Ore and Ferroalloys operating segment results for all periods prior to the respective deconsolidations as well as costs to exit are classified as discontinued operations.
Foreign Currency
Our financial statements are prepared with the U.S. dollar as the reporting currency. The functional currency of the Company’sour Australian subsidiaries is the Australian Dollar.dollar. The functional currency of all other international subsidiaries is the U.S. dollar. The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as Accumulated other comprehensive loss. Where the U.S. dollar is the functional currency, translation adjustments are recorded in the Statements of Consolidated Operations. Income taxes generally are not provided for foreign currency translation adjustments. To the extent that monetary assets and liabilities, inclusive of short-term and certain long-term intercompany loans, are recorded in a currency other than the functional currency, these amounts are remeasured each reporting period, with the resulting gain or loss being recorded in the Statements of Consolidated Operations. Transaction gains and losses resulting from remeasurement of intercompany loans are included in Miscellaneous - net in our Statements of Consolidated Operations.
The following represents the net gain (loss) related to impact of transaction gains and losses resulting from remeasurement for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | |
| | | (In Millions) |
| | | 2017 | | 2016 | | 2015 |
| Remeasurement of intercompany loans | | $ | 16.6 |
| | $ | (16.6 | ) | | $ | 11.5 |
|
| Remeasurement of cash and cash equivalents | | (2.5 | ) | | (1.0 | ) | | 1.5 |
|
| Other remeasurement | | (2.7 | ) | | 0.8 |
| | 3.3 |
|
| Net gain (loss) related to impact of transaction gains and losses resulting from remeasurement | | $ | 11.4 |
| | $ | (16.8 | ) | | $ | 16.3 |
|
Earnings Per Share
We present both basic and diluted earnings per share amounts.amounts for continuing operations and discontinued operations. Basic earnings per share amounts are calculated by dividing Net Income (Loss) Attributableincome (loss) attributable to Cliffs Shareholdersshareholders less any paid or declared but unpaid dividends on our depositary shares by the weighted average number of common shares outstanding during the period presented. Diluted earnings per share amounts are calculated by dividing Net Income (Loss) Attributableincome (loss) attributable to Cliffs Shareholdersshareholders by the weighted average number of common shares, common share equivalents under stock plans using the treasury stock method and the number of common shares that would be issued under an assumed conversion of our outstanding depositary shares, each representing a 1/40th interest in a share of our Series A Mandatory Convertible Preferred Stock, Class A, under the if-converted method. OurWe currently do not have any outstanding depositary shares. Historically, when we have had outstanding depositary shares, arethey were convertible into common shares based on the volume weighted average of closing prices of our common shares over the 20 consecutive trading day period ending on the third day immediately preceding the end of thethat reporting period.
Holders of the 1.50% 2025 Convertible Senior Notes may convert their notes during any quarter between April 1, 2018 and July 15, 2024 where our share price exceeds 130% of the conversion price for 20 trading days during a 30 trading day period. Holders of the 1.50% 2025 Convertible Senior Notes may also convert their notes during any quarter between April 1, 2018 and July 15, 2024 during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common shares and the conversion price on each such trading day. If our common shares rise in value above the conversion price, diluted EPS will be calculated based on the treasury-stock method with the number of dilutive shares being calculated based on the difference in the average share price and the conversion price. Common share equivalents are excluded from EPS computations in the periods in which they have an anti-dilutive effect. See NOTE 19 - EARNINGS PER SHARE for further information.
Recent Accounting Pronouncements
Issued and Adopted
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new standard simplifies hedge accounting through changes to both designation and measurement requirements. For hedges that qualify as highly effective, the new standard eliminates the requirement to separately measure and record hedge ineffectiveness resulting in better alignment between the presentation of the effects of the hedging instrument and the hedged item in the financial statements. We elected to early adopt ASU No. 2017-12 for the year ended December 31, 2017. The adoption of this standard required retrospective adoption, but did not impact prior-period financial results.
Issued and Not Effective
In AugustMay 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern. ASU 2014-15 will explicitly require management to assess an entity's ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Specifically, ASU 2014-15 provides a definition of the term "substantial doubt" and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The new standard will be effective for all entities in the first annual period ending after December 15, 2016 and for annual periods and interim periods thereafter. Earlier adoption is permitted. We are currently evaluating the impact the adoption of the guidance will have on the Statements of Consolidated Financial Position, Statements of Consolidated Operations or Statements of Consolidated Cash Flows.
In June 2014, the FASB issued ASUNo. 2014-09, RevenueRevenues from Contracts with Customers. Customers (Topic 606). The new revenue guidance broadly replaces the revenue guidance provided throughout the Codification. The core principle of the revenue guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new revenue guidance also requires the capitalization of certain contract acquisition costs. Reporting entities must provideprepare new disclosures providing qualitative and quantitative information on the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. New disclosures also include qualitative and quantitative information on significant judgments, changes in judgments, and contract acquisition assets. The update isWe will adopt the standard on its effective for annual periods and interim periods within those annual periods beginning afterdate of January 1, 2018 using the modified retrospective transition method. As of December 15, 2016 and may be adopted either retrospectively or retrospectively with31, 2017, we have completed the cumulative effect. Earlier adoption is not permitted. We are still evaluating the impactevaluation of the updated guidancenew standard and the related review and assessment of all existing contracts with our customers. Under Topic 606, revenue will generally
be recognized upon delivery for our U.S. Iron Ore customers, which in most cases is earlier than under the previous guidance. As an example, for certain iron ore shipments where revenue is deferred currently as title does not transfer until payment is received, under Topic 606, we will recognize revenue when control transfers, generally upon delivery. Due to the closure of the Soo Locks and the Welland Canal during the winter months, our revenues will be lower than historical levels during the first quarter and higher than historical levels during the remaining three quarters in future years. However, the total amount of revenue recognized during the year should remain substantially the same as under current GAAP. We do not anticipate any significant changes in the timing and pattern of revenue recognition for our Asia Pacific Iron Ore contracts. In addition to the timing impacts, we anticipate the primary impact on a full-year basis of the adoption on our consolidated financial statements will be the additional required disclosures around revenue recognition in the notes to the consolidated financial statements. As a result of the adoption of the new standard on January 1, 2018, we expect to record a cumulative transition adjustment of between $30 million and $35 million to Retained deficit in our Statements of Consolidated Financial Position related to shipments made in 2017 that would have been recognized as revenue in 2018 under the previous accounting guidance.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new standard requires the service cost component of pension and other postretirement benefit expenses to be included in the same line item as other compensation costs arising from services rendered by employees, with the other components of net benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The guidance is effective for fiscal years beginning after December 15, 2017. The adoption of ASU No. 2017-07 in the first quarter of 2018 will impact the Statements of Consolidated Operationsby changing our classification of the components of pension and OPEB costs; however, it will not impact our Net Income (Loss). The following represents the estimated impact from the adoption of ASU No. 2017-07 for the year ended December 31, 2017:
|
| | | | | | | | | | | | |
| | | ($ in Millions) |
| | | Year Ended December 31, 2017 |
| | | | | Estimate |
| Financial Statement Line Impacted | | As Reported | | Adoption of ASU No. 2017-07 | | As Adjusted |
| Cost of goods sold and operating expenses | | $ | (1,828.5 | ) | | $ | 2.4 |
| | $ | (1,826.1 | ) |
| Selling, general and administrative expenses | | $ | (105.8 | ) | | $ | (7.7 | ) | | $ | (113.5 | ) |
| Miscellaneous - net | | $ | 27.7 |
| | $ | (1.7 | ) | | $ | 26.0 |
|
| Operating income | | $ | 423.6 |
| | $ | (7.0 | ) | | $ | 416.6 |
|
| Other non-operating income | | $ | 3.2 |
| | $ | 7.0 |
| | $ | 10.2 |
|
| Net Income | | $ | 363.1 |
| | $ | — |
| | $ | 363.1 |
|
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases except for short-term leases. For lessees, leases will continue to be classified as either operating or Statementsfinance leases in the income statement. We plan to adopt the standard on its effective date of Consolidated Cash Flows.January 1, 2019. The new standard must be adopted using a modified retrospective approach and requires application of the new guidance at the beginning of the earliest comparative period presented. We are currently finalizing our implementation plan, compiling an inventory of existing leases and evaluating the effect the updated standard will have on our consolidated financial statements and related disclosures.
NOTE 2 - SEGMENT REPORTING
Our Company’scontinuing operations are organized and managed according to product category and geographic location: U.S. Iron Ore and Asia Pacific Iron Ore, North American Coal and Eastern Canadian Iron Ore. TheOur U.S. Iron Ore segment is compriseda major supplier of our interests in five U.S. mines that provide iron ore pellets to the integratedNorth American steel industry.industry from our mines and pellet plants located in Michigan and Minnesota. The Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to the seaborne market for Asian steel producers. The North American Coal segment as of December 31, 2014 is comprised of our two low-volatile metallurgical coal operations that provide metallurgical coal primarily to the integrated steel industry. Effective December 31, 2014, we sold our CLCC assets, which consisted of two high-volatile metallurgical coal mines and one thermal coal mine. As such, the results below include the CLCC results through the day of the sale completion. The Eastern Canadian Iron Ore segment is comprised of two Eastern Canadian mines that primarily provided iron ore to the seaborne market for Asian steel producers. Refer to NOTE 21 - SUBSEQUENT EVENTS for further discussion of our Bloom Lake mine, which is in the Eastern Canadian Iron Ore segment. There were no intersegment product revenues in 20142017, 2016 or 2012. Inter-segment revenues for 2013 were eliminated in consolidation.2015.
We have historically evaluatedevaluate segment performance based on sales margin, defined as revenues less cost of goods sold and operating expenses identifiable to each segment. Additionally, beginning in the third quarter of 2014, concurrent with the change in controlwe evaluate performance on July 29, 2014, management began to evaluatea segment performancebasis, as well as a consolidated basis, based on EBITDA definedand Adjusted EBITDA. These measures allow management and investors to focus on our ability to service our debt as Net Income (Loss) before interest, income taxes, depreciation, depletionwell as illustrate how the business and amortization,each operating segment are performing.
Additionally, EBITDA and Adjusted EBITDA definedassist management and investors in their analysis and forecasting as EBITDA excluding certain items such as impairment charges, impacts of permanently idled, closed or sold facilities, foreign currency remeasurement, severance and other costs associated with the acceleration of vesting and payout of outstanding equity grants due to the majority change in our Board of Directors, litigation judgments and intersegment corporate allocations of SG&A costs. Management uses and believes that investors benefit from referring to these measures in evaluating operating and financial results, as well as in planning, forecasting and analyzing future periods as these financial measures approximate the cash flows associated with the operational earnings.
The following tables present a summary of our reportable segments for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, including a reconciliation of segment sales margin to Income (Loss) from Continuing Operations Before Income Taxescontinuing operations before income taxes and Equity Income (Loss)equity loss from Venturesventures and a reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA:
| | | | (In Millions) | (In Millions) |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Revenues from product sales and services: | | | | | | | | | | | | |
| U.S. Iron Ore | $ | 2,506.5 |
| | 54% | | $ | 2,667.9 |
| | 47% | | $ | 2,723.3 |
| | 46% | $ | 1,866.0 |
| | 80% | | $ | 1,554.5 |
| | 74% | | $ | 1,525.4 |
| | 76% |
| Asia Pacific Iron Ore | 866.7 |
| | 19% | | 1,224.3 |
| | 22% | | 1,259.3 |
| | 22% | 464.2 |
| | 20% | | 554.5 |
| | 26% | | 487.9 |
| | 24% |
| North American Coal | 687.1 |
| | 15% | | 821.9 |
| | 14% | | 881.1 |
| | 15% | |
| Eastern Canadian Iron Ore | 563.4 |
| | 12% | | 978.7 |
| | 17% | | 1,008.9 |
| | 17% | |
| Other (including inter-segment revenue eliminations) | — |
| | —% | | (1.4 | ) | | —% | | 0.1 |
| | —% | |
| Total revenues from product sales and services | $ | 4,623.7 |
| | 100% | | $ | 5,691.4 |
| | 100% | | $ | 5,872.7 |
| | 100% | $ | 2,330.2 |
| | 100% | | $ | 2,109.0 |
| | 100% | | $ | 2,013.3 |
| | 100% |
| | | | | | | | | | | | | |
| Sales margin: | | | | | | | | | | | | |
| U.S. Iron Ore | $ | 710.4 |
| | $ | 901.9 |
| | $ | 976.2 |
| | $ | 465.4 |
| | $ | 275.7 |
| | $ | 227.1 |
| |
| Asia Pacific Iron Ore | 121.7 |
| | 367.1 |
| | 311.0 |
| | 36.3 |
| | 113.6 |
| | 9.4 |
| |
| North American Coal | (135.8 | ) | | (14.5 | ) | | (1.8 | ) | | |
| Eastern Canadian Iron Ore | (244.9 | ) | | (103.3 | ) | | (121.4 | ) | | |
| Other (including inter-segment sales margin eliminations) | — |
| | (1.9 | ) | | 8.1 |
| | |
| Sales margin | 451.4 |
| | 1,149.3 |
| | 1,172.1 |
| | 501.7 |
| | 389.3 |
| | 236.5 |
| |
| Other operating income (expense) | (9,896.7 | ) | | (478.3 | ) | | (1,480.9 | ) | | |
| Other operating expense | | (78.1 | ) | | (148.5 | ) | | (85.2 | ) | |
| Other income (expense) | (158.4 | ) | | (181.7 | ) | | (193.0 | ) | | (294.2 | ) | | (33.8 | ) | | 161.8 |
| |
| Income (loss) from continuing operations before income taxes and equity income (loss) from ventures | $ | (9,603.7 | ) | | $ | 489.3 |
| | $ | (501.8 | ) | | |
| Income from continuing operations before income taxes and equity loss from ventures | | $ | 129.4 |
| | $ | 207.0 |
| | $ | 313.1 |
| |
| | | | (In Millions) | (In Millions) |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | | | | | | |
| Net Income (Loss) | $ | (8,311.6 | ) | | $ | 361.8 |
| | $ | (1,126.6 | ) | |
| Net income (loss) | | $ | 363.1 |
| | $ | 199.3 |
| | $ | (748.4 | ) |
| Less: | | | | | | | | | | |
| Interest expense, net | (185.2 | ) | | (179.1 | ) | | (195.6 | ) | (132.0 | ) |
| (200.5 | ) |
| (231.4 | ) |
| Income tax benefit (expense) | 1,302.0 |
| | (55.1 | ) | | (255.9 | ) | 252.4 |
|
| 12.2 |
|
| (163.3 | ) |
| Depreciation, depletion and amortization | (504.0 | ) | | (593.3 | ) | | (525.8 | ) | (87.7 | ) |
| (115.4 | ) |
| (134.0 | ) |
| EBITDA | $ | (8,924.4 | ) | | $ | 1,189.3 |
| | $ | (149.3 | ) | |
| Total EBITDA | | $ | 330.4 |
| | $ | 503.0 |
| | $ | (219.7 | ) |
| Less: | | | | | | | | | | |
| Impairment of goodwill and other long-lived assets | $ | (9,029.9 | ) | | $ | (250.8 | ) | | $ | (1,049.9 | ) | |
| Impairment of equity method investment | — |
| | — |
| | (365.4 | ) | |
| Loss on sale of Cliffs Logan County Coal | (419.6 | ) | | — |
| | — |
| |
| Wabush mine impact | (158.7 | ) | | (72.7 | ) | | (30.1 | ) | |
| Bloom Lake mine impact | (137.9 | ) | | 46.5 |
| | 6.4 |
| |
| Gain (loss) on extinguishment/restructuring of debt | | $ | (165.4 | ) | | $ | 166.3 |
| | $ | 392.9 |
|
| Impact of discontinued operations | | (18.7 | ) | | (19.9 | ) | | (892.0 | ) |
| Foreign exchange remeasurement | 30.7 |
| | 64.0 |
| | (3.2 | ) | 11.4 |
| | (16.8 | ) | | 16.3 |
|
| Proxy contest and change in control costs in SG&A | (26.6 | ) | | — |
| | — |
| |
| Litigation judgment | (96.3 | ) | | (9.6 | ) | | — |
| |
| Severance in SG&A | (15.8 | ) | | (16.4 | ) | | — |
| |
| Severance and contractor termination costs | | — |
| | (0.1 | ) | | (10.2 | ) |
| Supplies inventory adjustment | | (1.8 | ) | | — |
| | (16.3 | ) |
| Impairment of other long-lived assets | | — |
|
| — |
|
| (3.3 | ) |
| Total Adjusted EBITDA | $ | 929.7 |
| | $ | 1,428.3 |
| | $ | 1,292.9 |
| $ | 504.9 |
| | $ | 373.5 |
| | $ | 292.9 |
|
| | | | | | | | | | | |
| EBITDA: | | | | | | | | | | |
| U.S. Iron Ore | $ | 805.6 |
| | $ | 1,000.1 |
| | $ | 1,045.3 |
| $ | 534.9 |
|
| $ | 342.4 |
|
| $ | 317.6 |
|
| Asia Pacific Iron Ore | (369.8 | ) | | 500.4 |
| | 387.3 |
| 40.7 |
|
| 128.3 |
|
| 35.3 |
|
| North American Coal | (1,326.8 | ) | | 129.5 |
| | 74.0 |
| |
| Eastern Canadian Iron Ore | (7,673.9 | ) | | (192.8 | ) | | (1,103.3 | ) | |
| Other | (359.5 | ) | | (247.9 | ) | | (552.6 | ) | |
| Other (including discontinued operations) | | (245.2 | ) |
| 32.3 |
|
| (572.6 | ) |
| Total EBITDA | $ | (8,924.4 | ) | | $ | 1,189.3 |
| | $ | (149.3 | ) | $ | 330.4 |
| | $ | 503.0 |
| | $ | (219.7 | ) |
| | | | | | | | | | | |
| Adjusted EBITDA: | | | | | | | | | | |
| U.S. Iron Ore | $ | 831.2 |
| | $ | 1,030.8 |
| | $ | 1,085.6 |
| $ | 559.4 |
| | $ | 359.6 |
| | $ | 352.1 |
|
| Asia Pacific Iron Ore | 264.6 |
| | 525.7 |
| | 402.1 |
| 50.4 |
| | 132.9 |
| | 32.7 |
|
| North American Coal | (28.5 | ) | | 154.0 |
| | 106.7 |
| |
| Eastern Canadian Iron Ore | — |
| | — |
| | — |
| |
| Other | (137.6 | ) | | (282.2 | ) | | (301.5 | ) | (104.9 | ) | | (119.0 | ) | | (91.9 | ) |
| Total Adjusted EBITDA | $ | 929.7 |
| | $ | 1,428.3 |
| | $ | 1,292.9 |
| $ | 504.9 |
| | $ | 373.5 |
| | $ | 292.9 |
|
|
| | | | | | | | | | | |
| | (In Millions) |
| | 2014 | | 2013 | | 2012 |
| Depreciation, depletion and amortization: | | | | | |
| U.S. Iron Ore | $ | 107.4 |
| | $ | 120.3 |
| | $ | 100.9 |
|
| Asia Pacific Iron Ore | 145.9 |
| | 153.7 |
| | 151.9 |
|
| North American Coal | 106.9 |
| | 128.9 |
| | 98.2 |
|
| Eastern Canadian Iron Ore | 135.6 |
| | 178.5 |
| | 160.2 |
|
| Other | 8.2 |
| | 11.9 |
| | 14.6 |
|
| Total depreciation, depletion and amortization | $ | 504.0 |
| | $ | 593.3 |
| | $ | 525.8 |
|
| | | | | | |
Capital additions1: | | | | | |
| U.S. Iron Ore | $ | 48.4 |
| | $ | 53.3 |
| | $ | 168.8 |
|
| Asia Pacific Iron Ore | 10.8 |
| | 13.0 |
| | 87.7 |
|
| North American Coal | 28.8 |
| | 55.0 |
| | 144.1 |
|
| Eastern Canadian Iron Ore | 141.2 |
| | 625.5 |
| | 865.2 |
|
| Other | 6.3 |
| | 5.5 |
| | 69.5 |
|
| Total capital additions | $ | 235.5 |
| | $ | 752.3 |
| | $ | 1,335.3 |
|
1 Includes capital lease additions and non-cash accruals. Refer to NOTE 17 - CASH FLOW INFORMATION. |
| | | | | | | | | | | |
| | (In Millions) |
| | 2017 | | 2016 | | 2015 |
| Depreciation, depletion and amortization: | | | | | |
| U.S. Iron Ore | $ | 66.6 |
| | $ | 84.0 |
| | $ | 98.9 |
|
| Asia Pacific Iron Ore | 14.3 |
| | 25.1 |
| | 25.3 |
|
| Other | 6.8 |
| | 6.3 |
| | 6.6 |
|
| Total depreciation, depletion and amortization | $ | 87.7 |
| | $ | 115.4 |
| | $ | 130.8 |
|
| | | | | | |
Capital additions1: | | | | | |
| U.S. Iron Ore | $ | 136.8 |
| | $ | 62.2 |
| | $ | 58.2 |
|
| Asia Pacific Iron Ore | 2.8 |
| | 0.2 |
| | 5.4 |
|
Other2 | 16.4 |
| | 6.1 |
| | 8.6 |
|
| Total capital additions | $ | 156.0 |
| | $ | 68.5 |
| | $ | 72.2 |
|
| | | | | | |
1 Includes capital lease additions and non-cash accruals. Refer to NOTE 17 - CASH FLOW INFORMATION. |
2 Includes spend related to our HBI project. |
A summary of assets by segment is as follows:
| | | | (In Millions) | (In Millions) |
| | December 31,
2014 | | December 31, 2013 | | December 31, 2012 | December 31,
2017 | | December 31, 2016 | | December 31, 2015 |
| Assets: | | | | | | | | | | |
| U.S. Iron Ore | $ | 1,598.3 |
| | $ | 1,671.6 |
| | $ | 1,735.1 |
| $ | 1,500.6 |
| | $ | 1,372.5 |
| | $ | 1,476.4 |
|
| Asia Pacific Iron Ore | 274.6 |
| | 1,078.4 |
| | 1,506.3 |
| 138.8 |
| | 155.1 |
| | 202.5 |
|
| North American Coal | 274.2 |
| | 1,841.8 |
| | 1,877.8 |
| |
| Eastern Canadian Iron Ore | 305.8 |
| | 7,915.5 |
| | 7,605.1 |
| |
| Other | 164.3 |
| | 455.6 |
| | 570.9 |
| |
| Total segment assets | 2,617.2 |
| | 12,962.9 |
| | 13,295.2 |
| 1,639.4 |
| | 1,527.6 |
| | 1,678.9 |
|
| Corporate | 546.8 |
| | 159.0 |
| | 279.7 |
| 1,314.0 |
| | 396.3 |
| | 441.7 |
|
| Assets of discontinued operations | | — |
| | — |
| | 14.9 |
|
| Total assets | $ | 3,164.0 |
| | $ | 13,121.9 |
| | $ | 13,574.9 |
| $ | 2,953.4 |
| | $ | 1,923.9 |
| | $ | 2,135.5 |
|
Included in the consolidated financial statements are the following amounts relating to geographic location:
| | | | (In Millions) | (In Millions) |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Revenue | | | | | | |
| Revenues from product sales and services | | | | | | |
| United States | $ | 2,139.4 |
| | $ | 1,857.6 |
| | $ | 2,108.5 |
| $ | 1,504.5 |
| | $ | 1,236.2 |
| | $ | 1,206.4 |
|
| China | 1,049.0 |
| | 1,909.4 |
| | 2,008.2 |
| 364.7 |
| | 452.5 |
| | 370.8 |
|
| Canada | 439.1 |
| | 871.2 |
| | 728.1 |
| 206.2 |
| | 267.1 |
| | 282.4 |
|
| Other countries | 996.2 |
| | 1,053.2 |
| | 1,027.9 |
| 254.8 |
| | 153.2 |
| | 153.7 |
|
| Total revenue | $ | 4,623.7 |
| | $ | 5,691.4 |
| | $ | 5,872.7 |
| |
| Total revenues from product sales and services | | $ | 2,330.2 |
| | $ | 2,109.0 |
| | $ | 2,013.3 |
|
| Property, Plant and Equipment, Net | | | | | | | | | | |
| United States | $ | 1,093.7 |
| | $ | 2,721.6 |
| | $ | 2,795.3 |
| $ | 1,033.8 |
| | $ | 961.0 |
| | $ | 1,012.7 |
|
| Australia | 72.4 |
| | 751.0 |
| | 1,042.4 |
| 17.2 |
| | 23.4 |
| | 46.3 |
|
| Canada | 248.8 |
| | 7,680.8 |
| | 7,369.6 |
| |
| Total Property, Plant and Equipment, Net | $ | 1,414.9 |
| | $ | 11,153.4 |
| | $ | 11,207.3 |
| $ | 1,051.0 |
| | $ | 984.4 |
| | $ | 1,059.0 |
|
Concentrations in Revenue
In 2014,2017 and 2016, two customers accounted for more than 10 percent of our consolidated product revenue. In 2013 and 2012, one customer in each year individually accounted for more than 10 percent10% of our consolidated product revenue and in 2015, three customers individually accounted for more than 10% of our consolidated product revenue. Total product revenue from these customers accounted for more than 10 percent of our consolidated product revenues and represents approximately $1.6$1.3 billion, $1.0$1.1 billion and $0.9$1.3 billion of our total consolidated product revenue in 2014, 20132017, 2016 and 2012,2015, respectively, and is attributable to our U.S. Iron Ore North American Coal and Eastern Canadian Iron Ore business segments.segment.
The following table represents the percentage of our total revenueRevenues from product sales and services contributed by each category of products and services in 2014, 2013,2017, 2016 and 2012:2015:
|
| | | | | | | | | |
| | | 2014 | | 2013 | | 2012 |
| Revenue Category | | | | | | |
| Iron ore | | 78 | % | | 80 | % | | 81 | % |
| Coal | | 12 | % | | 13 | % | | 13 | % |
| Freight and venture partners’ cost reimbursements | | 10 | % | | 7 | % | | 6 | % |
| Total revenue | | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Revenue category | | | | | | |
| Product | | 90 | % | | 91 | % | | 91 | % |
| Freight and venture partners’ cost reimbursements | | 10 | % | | 9 | % | | 9 | % |
| Total revenues from product sales and services | | 100 | % | | 100 | % | | 100 | % |
NOTE 3 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Consolidated Financial Position as of December 31, 20142017 and 2013:2016:
| | | | (In Millions) | (In Millions) |
| | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Segment | Finished Goods | | Work-in Process | | Total Inventory | | Finished Goods | | Work-in Process | | Total Inventory | Finished Goods | | Work-in Process | | Total Inventory | | Finished Goods | | Work-in Process | | Total Inventory |
| U.S. Iron Ore | $ | 132.1 |
| | $ | 13.5 |
| | $ | 145.6 |
| | $ | 92.1 |
| | $ | 13.0 |
| | $ | 105.1 |
| $ | 127.1 |
| | $ | 11.3 |
| | $ | 138.4 |
| | $ | 124.4 |
| | $ | 12.6 |
| | $ | 137.0 |
|
| Asia Pacific Iron Ore | 26.4 |
| | 88.1 |
| | 114.5 |
| | 39.7 |
| | 50.6 |
| | 90.3 |
| 33.3 |
| | 11.7 |
| | 45.0 |
| | 23.6 |
| | 17.8 |
| | 41.4 |
|
| North American Coal | 33.1 |
| | 17.2 |
| | 50.3 |
| | 59.4 |
| | 23.2 |
| | 82.6 |
| |
| Eastern Canadian Iron Ore | 16.3 |
| | — |
| | 16.3 |
| | 65.3 |
| | 48.1 |
| | 113.4 |
| |
| Total | $ | 207.9 |
| | $ | 118.8 |
| | $ | 326.7 |
| | $ | 256.5 |
| | $ | 134.9 |
| | $ | 391.4 |
| $ | 160.4 |
| | $ | 23.0 |
| | $ | 183.4 |
| | $ | 148.0 |
| | $ | 30.4 |
| | $ | 178.4 |
|
U.S. Iron Ore
The excess of current cost over LIFO cost of iron ore inventories was $119.0$96.2 million and $115.3$78.5 million at December 31, 20142017 and 2013,2016, respectively. As of December 31, 2014,2017, the product inventory balance for U.S. Iron Ore increased, resulting in a LIFO increment in 2014.2017. The effect of the inventory build was an increase in Inventories of $44.8$6.2 million in the Statements of Consolidated Financial Position for the year ended December 31, 2014.2017. As of December 31, 2013,2016, the product inventory balance for U.S. Iron Ore declined, resulting in the liquidation of a LIFO layer in 2013.2016. The effect of the inventory reduction was a decreasean increase in Cost of goods sold and operating expenses of $7.4$8.8 million in the Statements of Consolidated OperationsFinancial Position for the year ended December 31, 2013.2016.
North American Coal
We recorded LCM inventory charges of $44.5 million, $11.1 million and $24.4 million in Cost of goods sold and operating expenses in the Statements of Consolidated Operations for the years ended December 31, 2014, 2013 and 2012, respectively, for our North American Coal operations. The charges in 2014 were a result of market pricing declines. The charges in 2013 and 2012 were a result of market pricing declines and costs associated with operational and geological issues.
Eastern CanadianAsia Pacific Iron Ore
We recorded LCMa lower of cost or net realizable value inventory chargescharge of $38.9$1.8 million related to work-in process inventory in Cost of goods sold and operating expenses in the Statements of Consolidated Operations for the year ended December 31, 2014,2017. The charge was predominantly a result of the decline in our realized revenue rate as well as the additional production and transportation costs required to be incurred in order for our Eastern Canadian Iron Ore operations. During 2014, we recorded $10.4 million and $17.5 million of LCM inventory charges related to work-in process inventory and finished goods inventory, respectively,to be ready for Bloom Lake. Additionally, we recorded $4.9 million and $6.1 million ofsale. There were no LCM inventory charges related to work-in process inventory and finished goods inventory, respectively, for Wabush. The charges at Eastern Canadian Iron Ore were primarily a result of declines in Platts 62 percent Fe fines spot pricing and the increased cost of production. At the end of March 2014, we idled our Wabush Scully mine in Newfoundland and Labrador and began to implement the permanent closure plan for the mine. In December 2014, iron ore production at the Bloom Lake mine was suspended and the Bloom Lake mine was placed in ‘‘care-and-maintenance’’ mode.
For the year ended December 31, 2013, the LCM concentrate and pellet inventory charges recorded were $13.2 million and $11.1 million, respectively, which were recorded in Cost of goods sold and operating expenses in the Statements of Consolidated Operations for our Eastern Canadian Iron Ore operations. Additionally, we recorded unsaleable inventory impairment charges of $10.6 million and $7.9 million, respectively, relating to Wabush pellets and concentrate inventory. Both of these charges were recorded in Cost of goods sold and operating expenses during 2013 and included in the Statements of Consolidated Operations for the year ended December 31, 2013 for our Eastern Canadian Iron Ore operations.
No LCM inventory adjustments were recorded for the year ended December 31, 2012 within the Eastern Canadian Iron Ore operating segment results.2016.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the carrying value of each of the major classes of our consolidated depreciable assets as of December 31, 20142017 and 2013:2016:
| | | | (In Millions) | (In Millions) |
| | December 31, | December 31, |
| | 2014 | | 2013 | 2017 | | 2016 |
| Land rights and mineral rights | $ | 590.2 |
| | $ | 7,819.6 |
| $ | 549.6 |
| | $ | 500.5 |
|
| Office and information technology | 75.5 |
| | 125.7 |
| 66.3 |
| | 65.1 |
|
| Buildings | 65.6 |
| | 255.2 |
| 86.8 |
| | 67.9 |
|
| Mining equipment | 732.6 |
| | 1,819.3 |
| 594.4 |
| | 592.2 |
|
| Processing equipment | 567.4 |
| | 2,148.6 |
| 617.0 |
| | 552.0 |
|
| Electric power facilities | 48.8 |
| | 114.3 |
| 57.0 |
| | 49.4 |
|
| Land improvements | 25.5 |
| | 69.3 |
| 23.7 |
| | 23.5 |
|
| Asset retirement obligation | | 19.2 |
| | 19.8 |
|
| Other | 60.8 |
| | 227.6 |
| 30.3 |
| | 28.1 |
|
| Construction in-progress | 51.3 |
| | 991.3 |
| 35.1 |
| | 42.8 |
|
| | 2,217.7 |
| | 13,570.9 |
| 2,079.4 |
| | 1,941.3 |
|
| Allowance for depreciation and depletion | (802.8 | ) | | (2,417.5 | ) | (1,028.4 | ) | | (956.9 | ) |
| | $ | 1,414.9 |
| | $ | 11,153.4 |
| $ | 1,051.0 |
| | $ | 984.4 |
|
We recorded depreciation expense of $320.6$78.8 million, $366.9$106.8 million and $293.5$119.2 million in the Statements of Consolidated Operations for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively.
At December 31, 2014, there was no accumulated amount of capitalized interest included within construction-in-progress. At December 31, 2013, $31.4 million of capitalized interest was included within construction in-progress, of which $17.4 million was capitalized during 2013.
During the second half of 2014, due to lower than previously expected profits as a result of decreased iron ore pricing expectations and increased costs, we determined that indicators of impairment with respect to certain of our long-lived assets or asset groups existed. Our asset groups generally consist of the assets and liabilities of one or moreour mines preparation plants and associated reserves for which thereserves. The lowest level of identifiable cash flows largely are independent of cash flows of other mines, preparation plants and associated reserves.
As a result of these assessments during 2014, we determined thatis at the future cash flows associated with our Eastern CanadianU.S. Iron Ore and Asia Pacific Iron Ore North American Coalsegment levels. For the years ended December 31, 2017 and Ferroalloys asset groups were not sufficient to support the recoverability of2015, although certain factors indicated that the carrying value of these productive assets. Accordingly, during 2014,certain asset groups may not be recoverable, an other long-lived assetassessment for the potential impairment charge of $8,839.0 million was recorded as Impairment of goodwillperformed and other long-lived assets in the Statements of Consolidated Operations related to property, plant and equipment. The fair value estimates were calculated using income and market approaches. Refer to NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS for further discussion of these impairments and related fair value estimates.
During the fourth quarter of 2013, we experienced higher than expected production costs and operational inefficiencies at our Wabush operations within our Eastern Canadian Iron Ore operating segment that resulted in continued declines in our profitability of that business, which represented an asset group for purposes of testing our long-lived assets for recoverability. Upon completion of an impairment analysis, itadjustment was determined the fair value was less than the carrying value of the asset group, which resulted in an other long-lived asset impairment charge of tangible property, plant and equipment of $140.1 million as Impairment of goodwill and other long-lived assets in the Statements of Consolidated Operations fornot required. For the year ended December 31, 2013. The fair2016, there were no factors present that indicated the carrying value estimate was calculated using a market approach.
Table of Contentscertain asset groups would not be recoverable; therefore, additional impairment assessments were not required.The net book value of the land rights and mineral rights as of December 31, 20142017 and 20132016 is as follows:follows:
| | | | (In Millions) | (In Millions) |
| | December 31, | December 31, |
| | 2014 | | 2013 | 2017 | | 2016 |
| Land rights | $ | 31.9 |
| | $ | 46.3 |
| $ | 12.4 |
| | $ | 11.6 |
|
| Mineral rights: |
| |
|
| |
|
| Cost | $ | 558.3 |
| | $ | 7,773.3 |
| $ | 537.2 |
| | $ | 488.9 |
|
| Depletion | (101.3 | ) | | (942.6 | ) | (119.1 | ) | | (112.2 | ) |
| Net mineral rights | $ | 457.0 |
| | $ | 6,830.7 |
| $ | 418.1 |
| | $ | 376.7 |
|
Accumulated depletion relating to mineral rights, which was recorded using the unit-of-production method, is included in Cost of goods sold and operating expenses. We recorded depletion expense of $173.0$6.8 million, $206.5$3.8 million and $209.8$7.4 million in the Statements of Consolidated Operations for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively. As discussed above, during 2014 we performed impairment assessments with respect to certain of our long-lived assets or asset groups. As a result of these assessments, we recorded an other long-lived asset impairment charge related to mineral rights of $5,772.7 million associated with our Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal and Ferroalloys asset groups.
NOTE 5 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of December 31, 20142017 and 2013:2016:
| | | ($ in Millions) | ($ in Millions) | | ($ in Millions) |
| December 31, 2014 | | |
| December 31, 2017 | | December 31, 2017 |
| Debt Instrument | | Type | | Annual Effective Interest Rate | | Final Maturity | | Total Principal Amount | | Total Debt | | | Annual Effective Interest Rate | | Total Principal Amount | | Debt Issuance Costs | | Unamortized Discounts | | Total Debt |
| Senior Secured Notes | | | | | | | | | |
| $400 Million 4.875% 2024 Senior Notes | | | 5.00% | | $ | 400.0 |
| | $ | (7.1 | ) | | $ | (2.6 | ) | | $ | 390.3 |
|
| Unsecured Notes | | | | | | | | | |
| $400 Million 5.90% 2020 Senior Notes | | | 5.98% | | 88.9 |
| | (0.2 | ) | | (0.1 | ) | | 88.6 |
|
| $500 Million 4.80% 2020 Senior Notes | | | 4.83% | | 122.4 |
| | (0.3 | ) | | (0.1 | ) | | 122.0 |
|
| $700 Million 4.875% 2021 Senior Notes | | Fixed | | 4.88% | | 2021 | | $ | 690.0 |
| | $ | 689.5 |
| (1) | | 4.89% | | 138.4 |
| | (0.3 | ) | | (0.1 | ) | | 138.0 |
|
| $1.3 Billion Senior Notes: | | | | | | |
| $500 Million 4.80% 2020 Senior Notes | | Fixed | | 4.83% | | 2020 | | 490.0 |
| | 489.4 |
| (2) | |
| $316.25 Million 1.50% 2025 Convertible Senior Notes | | | 6.26% | | 316.3 |
| | (6.6 | ) | | (85.6 | ) | | 224.1 |
|
| $1.075 Billion 5.75% 2025 Senior Notes | | | 6.01% | | 1,075.0 |
| | (11.3 | ) | | (16.5 | ) | | 1,047.2 |
|
| $800 Million 6.25% 2040 Senior Notes | | Fixed | | 6.34% | | 2040 | | 800.0 |
| | 790.5 |
| (3) | | 6.34% | | 298.4 |
| | (2.4 | ) | | (3.4 | ) | | 292.6 |
|
| $400 Million 5.90% 2020 Senior Notes | | Fixed | | 5.98% | | 2020 | | 395.0 |
| | 393.7 |
| (4) | |
| $500 Million 3.95% 2018 Senior Notes | | Fixed | | 5.17% | | 2018 | | 480.0 |
| | 477.4 |
| (5) | |
| $1.125 Billion Credit Facility: | | | | | | |
| Revolving Credit Agreement | | Variable | | 2.94% | | 2017 | | 1,125.0 |
| | — |
| (6) | |
| Equipment Loans | | Fixed | | Various | | 2020 | | 164.8 |
| | 140.8 |
| | |
| ABL Facility | | | N/A | | 550.0 |
| | N/A |
| | N/A |
| | — |
|
| Fair Value Adjustment to Interest Rate Hedge | | | | 2.8 |
| | | | | | | | | 1.4 |
|
| Total debt | | $ | 4,144.8 |
| | $ | 2,984.1 |
| | |
| Less current portion | |
| | | | 21.8 |
| | |
| Long-term debt | | | | $ | 2,962.3 |
| | | | | | | | | $ | 2,304.2 |
|
| | | ($ in Millions) | ($ in Millions) | | ($ in Millions) |
| December 31, 2013 | | |
| December 31, 2016 | | December 31, 2016 |
| Debt Instrument | | Type | | Annual Effective Interest Rate | | Final Maturity | | Total Face Amount | | Total Debt | | | Annual Effective Interest Rate | | Total Principal Amount | | Debt Issuance Costs | | Undiscounted Interest/(Unamortized Discounts) | | Total Debt |
| Senior Secured Notes | | | | | | | | | | | |
| $540 Million 8.25% 2020 First Lien Notes | | | 9.97% | | $ | 540.0 |
| | $ | (8.0 | ) | | $ | (25.7 | ) | | $ | 506.3 |
|
| $218.5 Million 8.00% 2020 1.5 Lien Notes | | | N/A | | 218.5 |
| | — |
| | 65.7 |
| | 284.2 |
|
| $544.2 Million 7.75% 2020 Second Lien Notes | | | 15.55% | | 430.1 |
| | (5.8 | ) | | (85.2 | ) | | 339.1 |
|
| Unsecured Notes | | | | | | | | | |
| $400 Million 5.90% 2020 Senior Notes | | | 5.98% | | 225.6 |
| | (0.6 | ) | | (0.5 | ) | | 224.5 |
|
| $500 Million 4.80% 2020 Senior Notes | | | 4.83% | | 236.8 |
| | (0.7 | ) | | (0.2 | ) | | 235.9 |
|
| $700 Million 4.875% 2021 Senior Notes | | Fixed | | 4.88% | | 2021 | | $ | 700.0 |
| | $ | 699.4 |
| (1) | | 4.89% | | 309.4 |
| | (1.0 | ) | | (0.2 | ) | | 308.2 |
|
| $1.3 Billion Senior Notes: | | | | | | |
| $500 Million 4.80% 2020 Senior Notes | | Fixed | | 4.83% | | 2020 | | 500.0 |
| | 499.2 |
| (2) | |
| $800 Million 6.25% 2040 Senior Notes | | Fixed | | 6.34% | | 2040 | | 800.0 |
| | 790.4 |
| (3) | | 6.34% | | 298.4 |
| | (2.5 | ) | | (3.4 | ) | | 292.5 |
|
| $400 Million 5.90% 2020 Senior Notes | | Fixed | | 5.98% | | 2020 | | 400.0 |
| | 398.4 |
| (4) | |
| $500 Million 3.95% 2018 Senior Notes | | Fixed | | 4.14% | | 2018 | | 500.0 |
| | 496.5 |
| (5) | |
| $1.75 Billion Credit Facility: | | | | | | |
| Revolving Loan | | Variable | | 1.64% | | 2017 | | 1,750.0 |
| | — |
| (6) | |
| Equipment Loans | | Fixed | | Various | | 2020 | | 164.8 |
| | 161.7 |
| | |
| ABL Facility | | | N/A | | 550.0 |
| | N/A |
| | N/A |
| | — |
|
| Fair Value Adjustment to Interest Rate Hedge | | | | (2.1 | ) | | | | | | | | | 1.9 |
|
| Total debt | | $ | 4,814.8 |
| | $ | 3,043.5 |
| | |
| Long-term debt | | |
|
| | | | | | $ | 2,192.6 |
|
| Less current portion | | | | 20.9 |
| | | | | | | | | 17.5 |
|
| Long-term debt | | | | $ | 3,022.6 |
| | | | | | | | | $ | 2,175.1 |
|
| |
(1) | During the fourth quarter of 2014, we purchased $10.0 million of outstanding 4.875 percent senior notes that were trading at a discount of 40.5 percent which resulted in a gain on the extinguishment of debt of $4.1 million. As of December 31, 2014, the $700.0 million 4.875 percent senior notes were recorded at a par value of $690.0 million less unamortized discounts of $0.5 million, based on an imputed interest rate of 4.88 percent. As of December 31, 2013, the $700.0 million 4.875 percent senior notes were recorded at a par value of $700.0 million less unamortized discounts of $0.6 million, based on an imputed interest rate of 4.88 percent. |
| |
(2) | During the fourth quarter of 2014, we purchased $10.0 million of outstanding 4.80 percent senior notes that were trading at a discount of 40.25 percent which resulted in a gain on the extinguishment of debt of $4.0 million. As of December 31, 2014, the $500.0 million 4.80 percent senior notes were recorded at a par value of $490.0 million less unamortized discounts of $0.6 million, based on an imputed interest rate of 4.83 percent. As of December 31, 2013, the $500.0 million 4.80 percent senior notes were recorded at a par value of $500.0 million less unamortized discounts of $0.8 million, based on an imputed interest rate of 4.83 percent. |
| |
(3) | As of December 31, 2014 and December 31, 2013, the $800.0 million 6.25 percent senior notes were recorded at par value of $800.0 million less unamortized discounts of $9.5 million and $9.6 million, respectively, based on an imputed interest rate of 6.34 percent. |
| |
(4) | During the fourth quarter of 2014, we purchased $5.0 million of outstanding 5.90 percent senior notes that were trading at a discount of 38.125 percent which resulted in a gain on the extinguishment of debt of $1.9 million. As of December 31, 2014, the $400.0 million 5.90 percent senior notes were recorded at a par value of $395.0 million less unamortized discounts of $1.3 million, based on an imputed interest rate of 5.98 percent. As of December 31, 2013, the $400.0 million 5.90 percent senior notes were recorded at a par value of $400.0 million less unamortized discounts of $1.6 million, based on an imputed interest rate of 5.98 percent. |
| |
(5) | During the fourth quarter of 2014, we purchased $20.0 million of outstanding 3.95 percent senior notes that were trading at a discount of 30.875 percent which resulted in a gain on the extinguishment of debt of $6.2 million. As of December 31, 2014, the $500.0 million 3.95 percent senior notes were recorded at a par value of $480.0 million less unamortized discounts of $2.6 million, based on an imputed interest rate of 5.17 percent. As of December 31, 2013, the $500.0 million 3.95 percent senior notes were recorded at a par value of $500.0 million less unamortized discounts of $3.5 million, based on an imputed interest rate of 4.14 percent. |
| |
(6) | As of December 31, 2014and 2013, no revolving loans were drawn under the credit facility. We had total availability of $1.125 billion and $1.75 billion on our credit facility as of December 31, 2014 and 2013, respectively. Additionally, as of December 31, 2014 and December 31, 2013, the principal amount of letter of credit obligations totaled $149.5 million and $8.4 million, respectively, thereby reducing available borrowing capacity to $1.0 billion and $1.7 billion for each period, respectively.
|
Credit Facility$1.075 Billion 5.75% 2025 Senior Notes - 2017 Offering
On October 24, 2014,February 27, 2017, we amendedentered into an indenture among the revolving credit agreement (Amendment No 5.)Company, the guarantors party thereto and U.S. Bank National Association, as trustee, relating to effect the following:
Reducesissuance of $500 million aggregate principal amount of 5.75% 2025 Senior Notes. On August 7, 2017, we issued an additional $575 million aggregate principal amount of our 5.75% 2025 Senior Notes. The second tranche was issued at 97.0% of face value. The 5.75% 2025 Senior Notes were issued in private transactions exempt from the sizeregistration requirements of the Securities Act. Pursuant to the registration rights
agreement executed as part of the offerings, we agreed to file a registration statement with the SEC with respect to a registered offer to exchange the 5.75% 2025 Senior Notes for publicly registered notes within 365 days of the closing date, with all significant terms and conditions remaining the same.
The 5.75% 2025 Senior Notes bear interest at a rate of 5.75% per annum, which is payable semi-annually in arrears on March 1 and September 1 of each year, which commenced on September 1, 2017. The 5.75% 2025 Senior Notes mature on March 1, 2025.
The 5.75% 2025 Senior Notes are general unsecured senior obligations and rank equally in right of payment with all of our existing facilityand future senior unsecured indebtedness and rank senior in right of payment to all of our existing and future subordinated indebtedness. The 5.75% 2025 Senior Notes are effectively subordinated to our existing or future secured indebtedness to the extent of the value of the assets securing such indebtedness. The 5.75% 2025 Senior Notes are guaranteed on a senior unsecured basis by our material direct and indirect wholly-owned domestic subsidiaries and, therefore, are structurally senior to any of our existing and future indebtedness that is not guaranteed by such guarantors and are structurally subordinated to all existing and future indebtedness and other liabilities of our subsidiaries that do not guarantee the 5.75% 2025 Senior Notes.
The terms of the 5.75% 2025 Senior Notes are governed by an indenture, which contains customary covenants that, among other things, limit our and our subsidiaries' ability to create liens on property that secure indebtedness, enter into sale and leaseback transactions and merge, consolidate or amalgamate with another company. Upon the occurrence of a “change of control triggering event,” as defined in the indenture, we are required to offer to repurchase the 5.75% 2025 Senior Notes at 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest, if any, to, but excluding, the repurchase date.
We may redeem the 5.75% 2025 Senior Notes, in whole or in part, on or after March 1, 2020, at the redemption prices set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption, and prior to March 1, 2020, at a redemption price equal to 100% of the principal amount thereof plus a “make-whole” premium set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. We may also redeem up to 35% of the aggregate principal amount of the 5.75% 2025 Senior Notes on or prior to March 1, 2020 at a redemption price equal to 105.75% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of redemption with the net cash proceeds of one or more equity offerings.
The 5.75% 2025 Senior Notes indenture contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay or acceleration of certain other indebtedness, certain events of bankruptcy and insolvency and failure to pay certain judgments. An event of default under the indenture will allow either the trustee or the holders of at least 25% in aggregate principal amount of the then-outstanding notes issued under the indenture to accelerate, or in certain cases, will automatically cause the acceleration of, the amounts due under the 5.75% 2025 Senior Notes.
Debt issuance costs of $12.4 million were incurred related to the offering of the 5.75% 2025 Senior Notes, $11.3 million of which is included in Long-term debt in the Statements of Consolidated Financial Position as of December 31, 2017.
$400 Million 4.875% 2024 Senior Secured Notes - 2017 Offering
On December 19, 2017, we entered into an indenture among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee and first lien notes collateral agent, relating to the issuance of $400 million aggregate principal amount of 4.875% 2024 Senior Secured Notes at 99.347% of face value. The 4.875% 2024 Senior Secured Notes were issued in a private transaction exempt from $1.25 billion to $1.125 billion.the registration requirements of the Securities Act. The 4.875% 2024 Senior Secured Notes have not been, and will not be, registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act.
GrantsThe 4.875% 2024 Senior Secured Notes bear interest at a validrate of 4.875% per annum, which is payable semi-annually in arrears on January 15 and perfected first-priorityJuly 15 of each year, commencing on July 15, 2018. The 4.875% 2024 Senior Secured Notes mature on January 15, 2024 and are secured senior obligations of the Company.
The 4.875% 2024 Senior Secured Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by substantially all of our material domestic subsidiaries and will be secured (subject in each case to certain exceptions and permitted liens) security interest in certain propertyby (i) a first-priority lien on substantially all of our assets and the assets of the CompanyGuarantors (other than accounts receivable and other rights to payment, inventory, as-extracted collateral, certain investment property, certain general intangibles and commercial tort claims, certain mobile equipment, commodities
accounts, deposit accounts, securities accounts and other related assets and proceeds and products of its subsidiaries, subjecteach of the foregoing (collectively, the “ABL Collateral”)), and (ii) a second-priority lien on the ABL Collateral, which is junior to a first-priority lien for the benefit of the lenders under the Company’s senior secured asset-based credit facility.
The terms of the 4.875% 2024 Senior Secured Notes are governed by the Secured Notes Indenture. The Secured Notes Indenture contains customary exclusionscovenants that, among other things, limit our and our subsidiaries’ ability to create certain liens on property that secure indebtedness, use proceeds of dispositions of collateral, enter into sale and leaseback transactions, merge or consolidate with another company, and transfer or sell all specifiedor substantially all of our assets. Upon the occurrence of a “change of control triggering event,” as defined in the Secured Notes Indenture, we are required to offer to repurchase the 4.875% 2024 Senior Secured Notes at 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest, if any, to, but excluding, the repurchase date.
We may redeem any of the Secured Notes beginning on January 15, 2021. The initial redemption price is 102.438% of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The redemption price will decline each year after January 15, 2021 and will be 100% of their principal amount, plus accrued interest, beginning on January 15, 2023. We may also redeem some or all of the 4.875% 2024 Senior Secured Notes at any time and from time to time prior to January 15, 2021 at a security agreement.price equal to 100% of the principal amount thereof plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. We may also redeem up to 10% of the original aggregate principal amount of the 4.875% 2024 Senior Secured Notes (calculated after giving effect to any issuance of additional 4.875% 2024 Senior Secured Notes) per year prior to January 15, 2021 at a redemption price equal to 103% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
WithIn addition, at any time and from time to time on or prior to January 15, 2021, we may redeem in the aggregate up to 35% of the original aggregate principal amount of the Secured Notes (calculated after giving effect asto any issuance of September 30, 2014, removesadditional 4.875% 2024 Senior Secured Notes) with the maximum balance sheet leverage ratio of debt to capitalization of less than 45 percent, which was a covenant introduced in June 2014, and replaces that covenant with a maximum leverage ratio covenant of secured debt to EBITDA that is not to exceed 3.5 times.
Retains the minimum interest coverage ratio requirement of 3.5 times, and was subsequently reduced to 2.0 times upon completionnet cash proceeds of certain collateral actions within 60 daysequity offerings, at a redemption price of 104.875%, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, so long as at least 65% of the executionoriginal aggregate principal amount of the amendment. 4.875% 2024 Senior Secured Notes (calculated after giving effect to any issuance of additional 4.875% 2024 Senior Secured Notes) issued under the Secured Notes Indenture remain outstanding after each such redemption.
The collateral requirementsSecured Notes Indenture contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay or acceleration of certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. An event of default under the Secured Notes Indenture will allow either the Trustee or the holders of at least 25% in aggregate principal amount of the then-outstanding 4.875% 2024 Senior Secured Notes to accelerate, or in certain cases, will automatically cause the acceleration of, the amounts due under the 4.875% 2024 Senior Secured Notes.
Debt issuance costs of $7.1 million were satisfiedincurred related to the offering of the 4.875% 2024 Senior Secured Notes and are included in Long-term debt in the Statements of Consolidated Financial Position as of December 23, 2014.31, 2017.
Subjects restricted payments (including the $200 million share repurchase, which was approved in September 2014) and current dividend structure to a $400 million liquidity test.
Adds limitations regarding acquisitions, investments (including investments in non-wholly owned subsidiaries and joint ventures) and subsidiary debt.
Eliminates the accounts receivable securitization facility.
Terminates the ability to have foreign borrowers under the revolving credit agreement.$316.25 Million 1.50% 2025 Convertible Senior Notes - 2017 Offering
On September 9, 2014,December 19, 2017, we amended the revolving credit agreement (Amendment No. 4) to effect the following:
Permitting a one-time exemption of up to $200issued $316.25 million in share repurchases (consummated in a single transaction or series of related transactions), effective until December 31, 2015. We are not obligated to make any purchases and the program may be suspended or discontinued at any time.
Reducing the size of the existing unsecured facility from $1.75 billion to $1.25 billion.
Adding restrictions on the granting of certain pledges and guarantees.
Adding an obligation to enter into a security agreement, on or before June 30, 2015, to grant security interests to secure obligations under the revolving credit agreement on U.S. receivables and inventory, other than receivables and related property subject to certain existing receivable securitization or other facilities, a pledge of 65 percent of the stock of all material, wholly-owned first-tier foreign subsidiaries and a pledge of all of the stock of all material U.S. subsidiaries, in each case, subject to certain limitations.
All terms of Amendment No. 3 as of June 30, 2014, as discussed below, remained in place and were not changed by Amendment No. 4 as of September 9, 2014.
On June 30, 2014, we amended the revolving credit agreement (Amendment No. 3) to effect the following:
Replacing the current maximum leverage covenant ratio of debt to earnings of less than 3.5 times with a maximum balance sheet leverage ratio of debt to capitalization of less than 45 percent.
Resetting the minimum interest coverage ratio from 2.5 to 1.0 to the ratio of 3.5 to 1.0.
Amending the definition of EBITDA to include certain cash charges related to the Company’s Wabush mine and other cash restructuring charges and the definition of net worth to exclude up to $1.0 billion in non-cash impairment charges.
Modifying the covenants restricting certain investments and acquisitions, the incurrence of certain indebtedness and liens, and theaggregate principal amount of dividends that may be declared or paid and shares that may be repurchased.
On January 22, 2015, we further amended the revolving credit agreement. Refer to NOTE 21 - SUBSEQUENT EVENTS for further information regarding Amendment No. 6.
As of December 31, 2014 and 2013, we were in compliance with all applicable financial covenants related to the revolving credit agreement.
$500 Million1.50% 2025 Convertible Senior Notes. The 1.50% 2025 Convertible Senior Notes — 2012 Offering
On December 6, 2012, we completedbear interest at a $500 million public offeringrate of senior notes at 3.95 percent due January 15, 2018. Interest is fixed and is1.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 20132018. The 1.50% 2025 Convertible Senior Notes mature on January 15, 2025.
Holders may convert their 1.50% 2025 Convertible Senior Notes at their option at any time prior to the close of business on the business day immediately preceding July 15, 2024, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2018 (and only during such calendar quarter), if the last reported sale price of our common shares, par value $0.125 per share, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five-business day period after any five-consecutive trading day period (the “measurement period”) in which the trading price (as defined below) per $1,000 principal amount of 1.50% 2025 Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common shares and the conversion rate on each such trading day; (3) if we call the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after July 15, 2024 until maturity. the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 1.50% 2025 Convertible Senior Notes
at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, common shares or a combination of cash and common shares, at our election.
The conversion rate will initially be 122.4365 common shares per $1,000 principal amount of 1.50% 2025 Convertible Senior Notes (equivalent to an initial conversion price of $8.17 per common share). The conversion rate will be subject to adjustment in some circumstances but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, or if we deliver a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 1.50% 2025 Convertible Senior Notes in connection with such a corporate event or notice of redemption, as the case may be.
We may not redeem the 1.50% 2025 Convertible Senior Notes prior to January 15, 2022. We may redeem all or any portion of the 1.50% 2025 Convertible Senior Notes, for cash at our option on or after January 15, 2022 if the last reported sale price of our common shares has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30-consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the 1.50% 2025 Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 1.50% 2025 Convertible Senior Notes.
It is our current intent to settle conversions through combination settlement with a specified dollar amount per $1,000 principal amount of notes of $1,000. Our ability to settle conversions through combination settlement and cash settlement will be subject to restrictions in the agreement governing our ABL Facility and may be subject to restrictions in agreements governing our future debt.
If we undergo a fundamental change as defined in the indenture, holders may require us to repurchase for cash all or any portion of their 1.50% 2025 Convertible Senior Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 1.50% 2025 Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The 1.50% 2025 Convertible Senior Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 1.50% 2025 Convertible Senior Notes; equal in right of payment to any of our unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
In accounting for the issuance of the notes, we separated the 1.50% 2025 Convertible Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component of $85.9 million representing the conversion option was determined by deducting the fair value of the liability component from the par value of the notes. The difference represents the debt discount that is amortized to interest expense over the term of the notes. The equity component is not remeasured as long as it continues to qualify for equity classification.
We allocated the total debt issuance costs incurred to the notes on a prorated basis using the aggregate principal balance. In accounting for the debt issuance costs related to the notes, we allocated the total amount of issuance costs incurred to liability and equity components. The issuance costs attributable to the equity component was netted against the equity component in Capital in excess of par value of shares for a net amount of $83.4 million. Debt issuance costs of $9.1 million were incurred related to the offering of the Secured Notes, $6.6 million of which are included in Long-term debt and $2.5 million of which are included in Capital in excess of par value of shares in the Statements of Consolidated Financial Position as of December 31, 2017.
Other Outstanding Unsecured Senior Notes
The following represents a summary of our unsecured senior notes' maturity and interest payable due dates:
|
| | | | |
| Debt Instrument | | Maturity | | Interest Payable (until maturity) |
| $400 Million 5.90% 2020 Senior Notes | | March 15, 2020 | | March 15 and September 15 |
| $500 Million 4.80% 2020 Senior Notes | | October 1, 2020 | | April 1 and October 1 |
| $700 Million 4.875% 2021 Senior Notes | | April 1, 2021 | | April 1 and October 1 |
| $800 Million 6.25% 2040 Senior Notes | | October 1, 2040 | | April 1 and October 1 |
The senior notes are unsecured obligations and rank equally in right of payment with all our other existing and future unsecured and unsubordinated indebtedness. There are no subsidiary guarantees of the interest and principal amounts. A portion of the net proceeds from the senior notes offering were used on December 28, 2012 to repay $270.0 million and $55.0 million outstanding private placement senior notes in the aggregate and also for the repayment of a portion of the borrowings outstanding under the term loan and the revolving credit facility.
The senior notes may be redeemed any time at our option not less than 30 days nor more than 60 days after prior notice is sent to the holders of the applicable series of notes. The senior notes are redeemable at a redemption price equal to the greater of (1) 100 percent100% of the principal amount of the notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semi-annual basis at the treasury rate plus 5035 basis points with respect to the 2018 senior notes, plus, in each case, accrued and unpaid interest to the date of redemption.
In addition, if a change of control triggering event occurs with respect to the senior notes, as defined in the agreement, we will be required to offer to purchase the notes of the applicable series at a purchase price equal to 101 percent of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
The terms of the senior notes contain certain customary covenants; however, there are no financial covenants.
Interest Rate Adjustment Based on Rating Events
The interest rate payable on the $500.0 million 3.95 percent senior notes may be subject to adjustments from time to time if either Moody's or S&P or, in either case, any Substitute Rating Agency thereof downgrades (or subsequently upgrades) the debt rating assigned to the senior notes. In no event shall (1) the interest rate for the senior notes be reduced to below the interest rate payable on the senior notes on the date of the initial issuance of senior notes or (2) the total increase in the interest rate on the senior notes exceed 2.00 percent above the interest rate payable on the senior notes on the date of the initial issuance of senior notes. During 2014, the interest rate payable on the $500.0 million 3.95 percent senior notes was increased from 3.95 percent ultimately to 5.70 percent based on Substitute Rating Agency downgrades throughout the year.
$1 Billion5.90% 2020 Senior Notes — 2011 Offering
On March 23, 2011 and April 1, 2011, respectively, we completed a $1 billion public offering of senior notes consisting of two tranches: a 10-year tranche of $700 million aggregate principal amount at 4.88 percent senior notes due April 1, 2021, and a 30-year tranche of $300 million aggregate principal amount at 6.25 percent senior notes due October 1, 2040, of which $500 million aggregate principal amount previously was issued during September 2010. Interest is fixed and is payable on April 1 and October 1 of each year, beginning on October 1, 2011, for both series of senior notes until maturity. The senior notes are unsecured obligations and rank equally in right of payment with all our other existing and future unsecured and unsubordinated indebtedness. There are no subsidiary guarantees of the interest and principal amounts. The net proceeds from the senior notes offering were used to fund a portion of the acquisition of Consolidated Thompson and to pay the related fees and expenses.
The senior notes may be redeemed any time at our option not less than 30 days nor more than 60 days after prior notice is sent to the holders of the applicable series of notes. The senior notes are redeemable at a redemption price equal to the greater of (1) 100 percent of the principal amount of the notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semi-annual basis at the treasury rate plus4.80% 2020 Senior Notes, 25 basis points with respect to the 4.875% 2021 senior notesSenior Notes and 40 basis points with respect to the 6.25% 2040 senior notes,Senior Notes, plus, in each case, accrued and unpaid interest to the date of redemption. However, if the 4.875% 2021 senior notesSenior Notes are redeemed on or after the date that is three months prior to their maturity date, the 4.875% 2021 senior notesSenior Notes will be redeemed at a redemption price equal to 100 percent100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to the date of redemption.
In addition, if a change of control triggering event occurs with respect to the senior notes, as defined in the agreement, we will be required to offer to purchase the notes of the applicable series at a purchase price equal to 101 percent101% of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
The terms of the senior notes contain certain customary covenants; however, there are no financial covenants.
$1 Billion Senior Notes — 2010 OfferingDebt Extinguishments - 2017
On September 20, 2010,During the year ended December 31, 2017, we completedissued 63.25 million common shares in an underwritten public offering. We received net proceeds of $661.3 million at a $1 billion public offering price of senior notes consisting of two tranches: a 10-year tranche of $500 million aggregate principal amount at 4.80 percent due October 1, 2020, and a 30-year tranche of $500 million aggregate principal amount at 6.25 percent due October 1, 2040. Interest is fixed and is payable on April 1 and October 1 of each year, beginning on April 1, 2011, for both series of senior notes until maturity.$10.75 per common share. The senior notes are unsecured obligations and rank equally in right of payment with allnet proceeds from the issuance of our other existingcommon shares and future senior unsecured and unsubordinated indebtedness. There are no subsidiary guarantees of the interest and principal amounts.
A portion of the net proceeds from the senior notes offering was used on September 22, 2010 to repay $350 million outstanding under our credit facility. A portionissuance of the net proceeds was also used for general corporate purposes, including funding of capital expenditures and$1.075 billion5.75% 2025 Senior Notes were used to fundredeem in full all of our outstanding 8.25% 2020 First Lien Notes, 8.00% 2020 1.5 Lien Notes and 7.75% 2020 Second Lien Notes. Additionally, through tender offers, we purchased certain of our 5.90% 2020 Senior Notes, our 4.80% 2020 Senior Notes and our 4.875% 2021 Senior Notes. The aggregate principal amount outstanding of debt redeemed was $1.611 billion, which resulted in a portionloss on extinguishment of $165.4 million.
The following is a summary of the acquisitiondebt extinguished during the year ended December 31, 2017 and the respective gain (loss) on extinguishment for the year ended December 31, 2017:
|
| | | | | | | | |
| (In Millions) |
| | | Year Ended
December 31, 2017 |
| | | Debt Extinguished | | Gain (Loss) on Extinguishment1 |
| Secured Notes | | | | |
| $540 Million 8.25% 2020 First Lien Notes | | $ | 540.0 |
| | $ | (93.5 | ) |
| $218.5 Million 8.00% 2020 1.5 Lien Notes | | 218.5 |
| | 45.1 |
|
| $544.2 Million 7.75% 2020 Second Lien Notes | | 430.1 |
| | (104.5 | ) |
| Unsecured Notes | | | | |
| $400 Million 5.90% 2020 Senior Notes | | 136.7 |
| | (7.8 | ) |
| $500 Million 4.80% 2020 Senior Notes | | 114.4 |
| | (1.9 | ) |
| $700 Million 4.875% 2021 Senior Notes | | 171.0 |
| | (2.8 | ) |
| | | $ | 1,610.7 |
| | $ | (165.4 | ) |
| | | | | |
1 This includes premiums paid related to the redemption of our notes of $110.0 million. |
Debt Extinguishments/Restructuring - 2016
8.00% 2020 1.5 Lien Notes Exchange
On March 2, 2016, we entered into an indenture among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee and notes collateral agent, relating to our issuance of Consolidated Thompson and related expenses.
The senior notes may be redeemed any time at our option not less than 30 days nor more than 60 days after prior notice is sent to the holders of the applicable series of notes. The senior notes are redeemable at a redemption price equal to the greater of (1) 100 percent of the$218.5 million aggregate principal amount of 8.00% 2020 1.5 Lien Notes. The 8.00% 2020 1.5 Lien Notes were issued in exchange offers for certain of our existing senior notes.
We accounted for the notes to be redeemed or (2)8.00% 2020 1.5 Lien Notes exchange as a troubled debt restructuring. For an exchange classified as a troubled debt restructuring, if the sumfuture undiscounted cash flows of the present valuesnewly issued debt are less than the net carrying value of the remaining scheduledoriginal debt, the carrying value of the newly issued debt is adjusted to the future undiscounted cash flow amount, a gain is recorded for the difference and no future interest expense is recorded. All future interest payments of principal and interest on the notes to be redeemed, discounted tonewly issued debt reduce the redemption datecarrying value. Accordingly, we recognized a gain of $174.3 million in the Gain (loss) on a semi-annual basis atextinguishment/restructuring of debt in the treasury rate plus 35 basis points with respect toStatements of Consolidated Operations for the 2020 senior notes and 40 basis points with respect to the 2040 senior notes, plus, in each case, accrued and unpaid interest to the dateyear ended December 31, 2016. Debt issuance costs incurred of redemption. In addition, if a change of control triggering event occurs with respect$5.2 million related to the notes exchange were expensed and were included in the Gain (loss) on extinguishment/restructuring of debt in the Statements of Consolidated Operations for the year ended December 31, 2016. As of December 31, 2016, $17.5 million of the undiscounted interest was recorded as current and classified as Other current liabilities in the Statements of Consolidated Financial Position.
The following is a summary of the debt exchanged for our $218.5 million 8.00% 2020 1.5 Lien Notes:
|
| | | | | | | | | | | | | | | | |
| ($ In Millions) |
| | | Debt Extinguished | | 1.5 Lien Amount Issued | | Carrying Value1 | | Gain on Restructuring2 |
| $544.2 Million 7.75% 2020 Second Lien Notes | | $ | 114.1 |
| | $ | 57.0 |
| | $ | 77.5 |
| | $ | 6.9 |
|
| $500 Million 3.95% 2018 Senior Notes | | 17.6 |
| | 11.4 |
| | 15.5 |
| | 1.8 |
|
| $400 Million 5.90% 2020 Senior Notes | | 65.1 |
| | 26.0 |
| | 35.4 |
| | 28.3 |
|
| $500 Million 4.80% 2020 Senior Notes | | 44.7 |
| | 17.9 |
| | 24.4 |
| | 19.5 |
|
| $700 Million 4.875% 2021 Senior Notes | | 76.3 |
| | 30.5 |
| | 41.5 |
| | 33.3 |
|
| $800 Million 6.25% 2040 Senior Notes | | 194.4 |
| | 75.7 |
| | 103.0 |
| | 84.5 |
|
| | | $ | 512.2 |
| | $ | 218.5 |
| | $ | 297.3 |
| | $ | 174.3 |
|
| | | | | | | | | |
1 Includes undiscounted interest payments |
2 Net of amounts expensed for unamortized original issue discount and deferred origination fees |
Debt-for-Equity Exchanges
During the year ended December 31, 2016, we will be required to offer to purchaseentered into a series of privately negotiated exchange agreements whereby we issued an aggregate of 8.2 million common shares in exchange for $10.0 million aggregate principal amount of our 3.95% 2018 Senior Notes, $20.1 million aggregate principal amount of our 4.80% 2020 Senior Notes and $26.8 million aggregate principal amount of our 4.875% 2021 Senior Notes. There were no exchanges that represented more than 1% of our outstanding common shares during any quarter. Accordingly, we recognized a gain of $11.3 million in Gain (loss) on extinguishment/restructuring of debt in the notesStatements of Consolidated Operations for the year ended December 31, 2016.
Other Debt Redemptions
Our 3.95% 2018 Senior Notes were redeemed in whole on September 16, 2016 at a purchasetotal redemption price equal to 101 percent of the principal amount, plus accrued and unpaid interest to the date$301.0 million, which included $283.6 million outstanding aggregate principal. As a result, we recorded a $19.9 million pre-tax loss on full retirement of purchase.
The terms of the senior notes contain certain customary covenants; however, there are no financial covenants.
$400 Million Senior Notes Offering — 2010 Offering
On March 17, 2010, we completed a $400 million public offering of senior notes due March 15, 2020. Interest at a fixed rate of 5.90 percent is payable on March 15 and September 15 of each year, beginning on September 15, 2010, until maturity on March 15, 2020. The senior notes are unsecured obligations and rank equallylong-term debt in right of payment with all of our other existing and future senior unsecured and unsubordinated indebtedness. There are no subsidiary guarantees of the interest and principal amounts.
A portion of the net proceeds from the senior notes offering was used on March 31, 2010 to repay our $200 million term loan under our credit facility, as well as to repay on May 27, 2010 our share of Amapá’s remaining debt outstanding of $100.8 million. In addition, we used the remainder of the net proceeds to help fund the acquisitions of Spider and CLCC during the third quarter of 2010.
The senior notes may be redeemed any time at our option not less than 30 days nor more than 60 days after prior notice is sent2016, which consisted of debt redemption premiums of $17.4 million and expenses of $2.5 million related to the holderswrite-off of unamortized debt issuance costs, unamortized bond discount and deferred losses on interest rate swaps. The loss was recorded against the applicable seriesGain (loss) on extinguishment/restructuring of notes. The senior notes are redeemable at a redemption price equal todebt in the greaterStatements of (1) 100 percent ofConsolidated Operations for the principal amount of the notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semi-annual basis, plus accrued and unpaid interest to the date of redemption. In addition, if a change of control triggering event occurs, we will be required to offer to purchase the notes at a purchase price equal to 101 percent of the principal amount, plus accrued and unpaid interest to the date of purchase.
The terms of the senior notes contain certain customary covenants; however, there are no financial covenants.
Equipment Loansyear ended December 31, 2016.
During the second half of 2013,year ended December 31, 2016, we entered into $164.8purchased with cash $5.0 million of seven-year installment equipment loans with various interest rates. The loans are secured by equipment from our Eastern Canadian Iron Ore operations as well asoutstanding 4.80% 2020 Senior Notes, which resulted in a parent guarantee. Proceeds from the borrowings were used for general corporate purposes.gain on extinguishment of $0.6 million.
Short-Term Facilities
Asia Pacific Iron Ore maintains a bank contingent instrument and cash advance facility. The facility, which is renewable annually at the bank’s discretion, provides A$3.0 million ($2.5 million) at December 31, 2014 in credit for contingent instruments, such as performance bonds, and the ability to request a cash advance facility to be provided at the discretion of the bank. The facility limit was reduced from A$30.0 million to A$3.0 million during the fourth quarter of 2014. At December 31, 2013, the facility provided A$30.0 million ($26.8 million) in credit for contingent instruments. As of December 31, 2014, the outstanding bank guarantees under the facility totaled A$1.5 million ($1.2 million), thereby reducing borrowing capacity to A$1.5 million ($1.3 million). As of December 31, 2013, the outstanding bank guarantees under the facility totaled A$23.0 million ($20.5 million), thereby reducing borrowing capacity to A$7.0 million ($6.3 million). We have provided a guarantee of the facility, along with certain of our Australian subsidiaries. The terms of the short-term facility contain certain customary covenants; however, there are no financial covenants.
Letters of Credit
We have outstanding letters of credit provided for under the amended revolving credit agreement which totaled $149.5 million and $8.4 million as of December 31, 2014 and December 31, 2013, respectively. Additionally, we issued standby letters of credit with certain financial institutions in addition to the letters of credit provided for under the revolving credit agreement of $48.0 million as of December 31, 2013.
Debt Maturities
The following represents a summary of our maturities of debt instruments, excluding borrowings on the amended revolving credit agreement,ABL Facility, based on the principal amounts outstanding at December 31, 2014:2017:
|
| | | |
| | (In Millions) |
| | Maturities of Debt |
| 2015 | $ | 21.8 |
|
| 2016 | 22.7 |
|
| 2017 | 23.6 |
|
| 2018 | 504.6 |
|
| 2019 | 25.5 |
|
| 2020 and thereafter | 2,397.6 |
|
| Total maturities of debt | $ | 2,995.8 |
|
|
| | | |
| | (In Millions) |
| | Maturities of Debt |
| 2018 | $ | — |
|
| 2019 | — |
|
| 2020 | 211.3 |
|
| 2021 | 138.4 |
|
| 2022 | — |
|
| 2023 and thereafter | 2,089.7 |
|
| Total maturities of debt | $ | 2,439.4 |
|
ABL Facility
132
TableOn March 30, 2015, we entered into a senior secured asset-based revolving credit facility with various financial institutions. The ABL Facility will mature upon the earlier of ContentsMarch 30, 2020 or 60 days prior to the maturity of the First Lien Notes and certain other material debt, and provides for up to $550.0 million in borrowings, comprised of (i) a $450.0 million U.S. tranche, including a $250.0 million sublimit for the issuance of letters of credit and a $100.0 million sublimit for U.S. swingline loans, and (ii) a $100.0 million Australian tranche, including a $50.0 million sublimit for the issuance of letters of credit and a $20.0 million sublimit for Australian swingline loans. Availability under both the U.S. tranche and Australian tranche of the ABL Facility is limited to an eligible U.S. borrowing base and Australian borrowing base, as applicable, determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment.The ABL Facility and certain bank products and hedge obligations are guaranteed by us and certain of our existing wholly-owned U.S. and Australian subsidiaries and are required to be guaranteed by certain of our future U.S. and Australian subsidiaries; provided, however, that the obligations of any U.S. entity will not be guaranteed by any Australian entity. Amounts outstanding under the ABL Facility will be secured by (i) a first-priority security interest in the ABL Collateral, including, in the case of the Australian tranche only, ABL Collateral owned by a borrower or guarantor that is organized under the laws of Australia, and (ii) a third-priority security interest in the Notes Collateral (as defined herein). The priority of the security interests in the ABL Collateral and the Notes Collateral of the lenders under the ABL Facility and the holders of the First Lien Notes are set forth in intercreditor provisions contained in an ABL intercreditor agreement.
The ABL Collateral generally consists of the following assets: accounts receivable and other rights to payment, inventory, as-extracted collateral, investment property, certain general intangibles and commercial tort claims, certain mobile equipment, commodities accounts, deposit accounts, securities accounts and other related assets and proceeds and products of each of the foregoing.
Borrowings under the ABL Facility bear interest, at our option, at a base rate, an Australian base rate or, if certain conditions are met, a LIBOR rate, in each case plus an applicable margin. The base rate is equal to the greater of the federal funds rate plus ½ of 1%, the LIBOR rate based on a one-month interest period plus 1% and the floating rate announced by Bank of America Merrill Lynch as its “prime rate.” The Australian base rate is equal to the LIBOR rate as of 11:00 a.m. on the first business day of each month for a one-month period. The LIBOR rate is a per annum fixed rate equal to LIBOR with respect to the applicable interest period and amount of LIBOR rate loan requested.
The ABL Facility contains customary representations and warranties and affirmative and negative covenants including, among others, covenants regarding the maintenance of certain financial ratios if certain conditions are triggered, covenants relating to financial reporting, covenants relating to the payment of dividends on, or purchase or redemption of our capital stock, covenants relating to the incurrence or prepayment of certain debt, covenants relating to the incurrence of liens or encumbrances, compliance with laws, transactions with affiliates, mergers and sales of all or substantially all of our assets and limitations on changes in the nature of our business.
The ABL Facility provides for customary events of default, including, among other things, the event of nonpayment of principal, interest, fees, or other amounts, a representation or warranty proving to have been materially incorrect when made, failure to perform or observe certain covenants within a specified period of time, a cross-default to certain material
indebtedness, the bankruptcy or insolvency of the Company and certain of its subsidiaries, monetary judgment defaults of a specified amount, invalidity of any loan documentation, a change of control of the Company, and ERISA defaults resulting in liability of a specified amount. In the event of a default by us (beyond any applicable grace or cure period, if any), the administrative agent may and, at the direction of the requisite number of lenders, shall declare all amounts owing under the ABL Facility immediately due and payable, terminate such lenders’ commitments to make loans under the ABL Facility and/or exercise any and all remedies and other rights under the ABL Facility. For certain defaults related to insolvency and receivership, the commitments of the lenders will be automatically terminated and all outstanding loans and other amounts will become immediately due and payable.
As of December 31, 2017 and 2016, we were in compliance with the ABL Facility liquidity requirements and, therefore, the springing financial covenant requiring a minimum fixed charge coverage ratio of 1.0 to 1.0 was not applicable.
As of December 31, 2017, no loans were drawn under the ABL Facility and we had total availability of $273.2 million as a result of borrowing base limitations. As of December 31, 2017, the principal amount of letter of credit obligations totaled $46.5 million, thereby further reducing available borrowing capacity on our ABL Facility to $226.7 million.
As of December 31, 2016, no loans were drawn under the ABL Facility and we had total availability of $333.0 million as a result of borrowing base limitations. As of December 31, 2016, the principal amount of letter of credit obligations totaled $106.0 million, thereby further reducing available borrowing capacity to $227.0 million.
Letters of Credit
We issued standby letters of credit with certain financial institutions in order to support business obligations including, but not limited to, workers compensation and environmental obligations. As of December 31, 2017 and 2016, these letter of credit obligations totaled $46.5 million and $106.0 million, respectively.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities of the Company measured at fair value at December 31, 20142017 and 2013:2016:
|
| | | | | | | | | | | | | | | |
| | (In Millions) |
| | December 31, 2017 |
| Description | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Assets: | | | | | | | |
| Cash equivalents | $ | 66.3 |
| | $ | 550.6 |
| | $ | — |
| | $ | 616.9 |
|
| Derivative assets | — |
| | — |
| | 39.4 |
| | 39.4 |
|
| Total | $ | 66.3 |
| | $ | 550.6 |
| | $ | 39.4 |
| | $ | 656.3 |
|
| Liabilities: | | | | | | | |
| Derivative liabilities | $ | — |
| | $ | 0.3 |
| | $ | 2.4 |
| | $ | 2.7 |
|
| Total | $ | — |
| | $ | 0.3 |
| | $ | 2.4 |
| | $ | 2.7 |
|
|
| | | | | | | | | | | | | | | |
| | (In Millions) |
| | December 31, 2016 |
| Description | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Assets: | | | | | | | |
| Cash equivalents | $ | 177.0 |
| | $ | — |
| | $ | — |
| | $ | 177.0 |
|
| Derivative assets | — |
| | 1.5 |
| | 31.6 |
| | 33.1 |
|
| Total | $ | 177.0 |
| | $ | 1.5 |
| | $ | 31.6 |
| | $ | 210.1 |
|
| Liabilities: | | | | | | | |
| Derivative liabilities | $ | — |
| | $ | — |
| | $ | 0.5 |
| | $ | 0.5 |
|
| Total | $ | — |
| | $ | — |
| | $ | 0.5 |
| | $ | 0.5 |
|
|
| | | | | | | | | | | | | | | |
| | (In Millions) |
| | December 31, 2014 |
| Description | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Assets: | | | | | | | |
| Derivative assets | — |
| | — |
| | 63.2 |
| | 63.2 |
|
| Available-for-sale marketable securities | 4.3 |
| | — |
| | — |
| | 4.3 |
|
| Total | $ | 4.3 |
| | $ | — |
| | $ | 63.2 |
| | $ | 67.5 |
|
| Liabilities: |
| |
| |
| |
|
| Derivative liabilities | $ | — |
| | $ | — |
| | $ | 11.8 |
| | $ | 11.8 |
|
| Foreign exchange contracts | — |
| | 31.5 |
| | — |
| | 31.5 |
|
| Total | $ | — |
| | $ | 31.5 |
| | $ | 11.8 |
| | $ | 43.3 |
|
|
| | | | | | | | | | | | | | | |
| | (In Millions) |
| | December 31, 2013 |
| Description | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Assets: | | | | | | | |
| Cash equivalents | $ | 85.0 |
| | $ | — |
| | $ | — |
| | $ | 85.0 |
|
| Derivative assets | — |
| | — |
| | 58.9 |
| | 58.9 |
|
| Available-for-sale marketable securities | 21.4 |
| | — |
| | — |
| | 21.4 |
|
| Foreign exchange contracts | — |
| | 0.3 |
| | — |
| | 0.3 |
|
| Total | $ | 106.4 |
| | $ | 0.3 |
| | $ | 58.9 |
| | $ | 165.6 |
|
| Liabilities: |
| |
| |
| |
|
| Derivative liabilities | $ | — |
| | $ | 2.1 |
| | $ | 10.3 |
| | $ | 12.4 |
|
| Foreign exchange contracts | — |
| | 26.9 |
| | — |
| | 26.9 |
|
| Total | $ | — |
| | $ | 29.0 |
| | $ | 10.3 |
| | $ | 39.3 |
|
Financial assets classified in Level 1 atas of December 31, 20142017, include available-for-sale marketable securities.money market funds and treasury bonds of $66.3 million. Financial assets classified in Level 1 atas of December 31, 20132016, include money market funds and available-for-sale marketable securities.of $177.0 million. The valuation of these instruments is based upon unadjusted quoted prices for identical assets in active markets.
The valuation of financial assets and liabilities classified in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable. Level 2 securities primarily include derivative financial instruments valued using financial models that use as their basis readily observable market parameters. At December 31, 2014, such derivative financial instrumentsassets included our existing foreign currency exchange contracts. At December 31, 2013, such derivative financial instruments included our existing foreign currency exchange contracts$550.6 million of commercial paper and interest rate swaps. The fair valuecertificates of the foreign currency exchange contracts
is based on forward market prices and represents the estimated amount we would receive or pay to terminate these agreements at the reporting date, taking into account creditworthiness, nonperformance risk and liquidity risks associated with current market conditions.
The derivative assets classified within Level 3deposit at December 31, 20142017 and $1.5 million of commodity hedge contracts at December 31, 20132016. Level 2 liabilities included a$0.3 million of commodity hedge contracts at December 31, 2017.
The Level 3 assets and liabilities include derivative assets that consist of freestanding derivative instrumentinstruments related to certain supply agreements with one of our U.S. Iron Ore customers and derivative assets and liabilities related to certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers.
The supply agreements included in our Level 3 assets include provisions for supplemental revenue or refunds based on the customer’saverage annual daily market price for hot-rolled coil steel pricing at the time the product is consumed in the customer’s blast furnaces. We account for this provisionthese provisions as a derivative instrumentinstruments at the time of sale and adjust this provisionthese provisions to fair value as an adjustment to Product revenues each reporting period until the product is consumed and the amounts are settled. The fair value of the instrument isinstruments are determined using a market approach based on anthe estimate of the average annual realizeddaily market price for hot-rolled coil steel. In the new contract that commenced in 2017,
this supplemental revenue and refund data source changed from the customer's average annual steel price to an average annual daily market price for hot-rolled coil steel for one of hot-rolled steel at the steelmaker’s facilities, andour supply agreements. This estimate takes into consideration current market conditions and nonperformance risk.
The Level 3 derivative We had assets of $37.9 million and liabilities$21.3 million at December 31, 20142017 and December 31, 2013 also consisted of derivatives2016, respectively, related to certainsupply agreements.
The provisional pricing arrangements withincluded in our U.S. Iron Ore, Asia Pacific Iron Ore and Eastern Canadian Iron Ore customers. These provisional pricing arrangementsLevel 3 assets/liabilities specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference between the provisionally agreed-upon priceestimated final revenue at the date of sale and the estimated final revenue rate at the measurement date is characterized as a derivative and is required to be accounted for separately once the revenue has been recognized. The derivative instrument is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rate is determined. We had assets of $1.5 million and $10.3 million at December 31, 2017 and 2016, respectively, related to provisional pricing arrangements. In addition, we had liabilities of $2.4 million and $0.5 million related to provisional pricing arrangements at December 31, 2017 and 2016, respectively.
The following table illustrates information about quantitative inputs and assumptions for the derivative assets and derivative liabilities categorized in Level 3 of the fair value hierarchy:
|
| | | | | | | | | | | | |
| Qualitative/Quantitative Information About Level 3 Fair Value Measurements |
| ($ in millions) | | Fair Value at | | Balance Sheet Location | | Valuation Technique | | Unobservable Input | | Range or Point Estimate (Weighted Average) |
| | 12/31/2014 |
| Provisional Pricing Arrangements | | $ | 11.8 |
| | Other current liabilities | | Market Approach | | Management's Estimate of 62% Fe | | $72 |
| Customer Supply Agreement | | $ | 63.2 |
| | Other current assets | | Market Approach | | Hot-Rolled Steel Estimate | | $590 - $640 ($610) |
The significant unobservable input used in the fair value measurement of the reporting entity’s provisional pricing arrangements is management’s estimate of 62 percent Fe fines spot price based upon current market data, including historical seasonality and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively. |
| | | | | | | | | | | | |
| Qualitative/Quantitative Information About Level 3 Fair Value Measurements |
| ($ in millions) | | Fair Value at December 31, 2017 | | Balance Sheet Location | | Valuation Technique | | Unobservable Input | | Range or Point Estimate (Weighted Average) |
| |
| Customer Supply Agreement | | $ | 37.9 |
| | Derivative assets | | Market Approach | | Management's Estimate of Market Hot-Rolled Coil Steel per net ton | | $655 |
| Provisional Pricing Arrangements | | $ | 1.5 |
| | Derivative assets | | Market Approach | | Management's Estimate of Platts 62% Price per dry metric ton | | $72 - $74 ($72) |
| Provisional Pricing Arrangements | | $ | 2.4 |
| | Other current liabilities | | Market Approach | | Management's Estimate of Platts 62% Price per dry metric ton | | $72 - $74 ($72) |
The significant unobservable input used in the fair value measurement of the reporting entity’sour customer supply agreementsagreement is an estimate determined by management including the futureforward-looking estimate for the average annual daily market price for hot-rolled steel price that is estimatedcoil steel.
The significant unobservable inputs used in the fair value measurement of our provisional pricing arrangements are management’s estimates of Platts 62% Price based onupon current market data analysts' projections, projections provided by the customer and index pricing, of which includes forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
We recognize any transfers between levels as of the beginning of the reporting period, including both transfers into and out of levels. There were no transfers between Level 1 and Level 2 and no transfers into or out of Level 3 of the fair value hierarchy during the years ended December 31, 20142017 and 2013.2016. The following tables represent a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 20142017 and 2013.2016:
| | | | (In Millions) | (In Millions) |
| | Derivative Assets (Level 3) | | Derivative Liabilities (Level 3) | Derivative Assets (Level 3) | | Derivative Liabilities (Level 3) |
| | Year Ended
December 31, | | Year Ended
December 31, | Year Ended
December 31, | | Year Ended
December 31, |
| | 2014 | | 2013 | | 2014 | | 2013 | 2017 | | 2016 | | 2017 | | 2016 |
| Beginning balance - January 1 | $ | 58.9 |
| | $ | 62.4 |
| | $ | (10.3 | ) | | $ | (11.3 | ) | $ | 31.6 |
| | $ | 7.8 |
| | $ | (0.5 | ) | | $ | (3.4 | ) |
| Total gains (losses) | | | | | | | | | | | | | | |
| Included in earnings | 187.8 |
| | 152.3 |
| | (11.8 | ) | | (10.3 | ) | 195.8 |
| | 103.8 |
| | (91.1 | ) | | (14.1 | ) |
| Settlements | (183.5 | ) | | (155.8 | ) | | 10.3 |
| | 11.3 |
| (188.0 | ) | | (80.0 | ) | | 89.2 |
| | 17.0 |
|
| Transfers into Level 3 | — |
| | — |
| | — |
| | — |
| |
| Transfers out of Level 3 | — |
| | — |
| | — |
| | — |
| |
| Ending balance - December 31 | $ | 63.2 |
| | $ | 58.9 |
| | $ | (11.8 | ) | | $ | (10.3 | ) | $ | 39.4 |
| | $ | 31.6 |
| | $ | (2.4 | ) | | $ | (0.5 | ) |
| Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) on assets still held at the reporting date | $ | 187.8 |
| | $ | 152.3 |
| | $ | (11.8 | ) | | $ | (10.3 | ) | $ | 39.4 |
| | $ | 23.7 |
| | $ | (2.4 | ) | | $ | (0.5 | ) |
Gains and losses included in earnings are reported in Product revenues in the Statements of Consolidated Operations for the years ended December 31, 20142017 and 2013.2016.
The carrying amount for certain financial instruments (e.g. Accounts receivable, net, Accounts payable and Accrued expenses) approximate fair value and, therefore, havehas been excluded from the table below. A summary of the carrying amount and fair value of other financial instruments at December 31, 20142017 and 2013 were2016 is as follows:
|
| | | | | | | | | | | | | | | | | |
| | | | (In Millions) |
| | | | December 31, 2014 | | December 31, 2013 |
| | Classification | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Long-term debt: | | | | | | | | | |
| Senior notes—$700 million | Level 2 | | 689.5 |
| | 367.3 |
| | 699.4 |
| | 718.2 |
|
| Senior notes—$1.3 billion | Level 2 | | 1,279.9 |
| | 704.0 |
| | 1,289.6 |
| | 1,404.9 |
|
| Senior notes—$400 million | Level 2 | | 393.7 |
| | 228.1 |
| | 398.4 |
| | 432.1 |
|
| Senior notes—$500 million | Level 2 | | 477.4 |
| | 312.0 |
| | 496.5 |
| | 523.8 |
|
| Revolving loan | Level 2 | | — |
| | — |
| | — |
| | — |
|
| Equipment Loan Facilities | Level 2 | | 119.0 |
| | 119.0 |
| | 140.8 |
| | 140.8 |
|
| Fair Value Adjustment to Interest Rate Hedge | Level 2 | | 2.8 |
| | 2.8 |
| | (2.1 | ) | | (2.1 | ) |
| Total long-term debt | | | $ | 2,962.3 |
| | $ | 1,733.2 |
| | $ | 3,022.6 |
| | $ | 3,217.7 |
|
|
| | | | | | | | | | | | | | | | | |
| | | | (In Millions) |
| | | | December 31, 2017 | | December 31, 2016 |
| | Classification | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Long-term debt: | | | | | | | | | |
| Secured Notes | | | | | | | | | |
| $400 Million 4.875% 2024 Senior Notes | Level 1 | | $ | 390.3 |
| | $ | 398.0 |
| | $ | — |
| | $ | — |
|
| $540 Million 8.25% 2020 First Lien Notes | Level 1 | | — |
| | — |
| | 506.3 |
| | 595.0 |
|
| $218.5 Million 8.00% 2020 1.5 Lien Notes | Level 2 | | — |
| | — |
| | 284.2 |
| | 229.5 |
|
| $544.2 Million 7.75% 2020 Second Lien Notes | Level 1 | | — |
| | — |
| | 339.1 |
| | 439.7 |
|
| Unsecured Notes | | | | | | | | | |
| $400 Million 5.90% 2020 Senior Notes | Level 1 | | 88.6 |
| | 88.0 |
| | 224.5 |
| | 219.6 |
|
| $500 Million 4.80% 2020 Senior Notes | Level 1 | | 122.0 |
| | 118.8 |
| | 235.9 |
| | 221.1 |
|
| $700 Million 4.875% 2021 Senior Notes | Level 1 | | 138.0 |
| | 130.8 |
| | 308.2 |
| | 283.1 |
|
| $316.25 Million 1.50% 2025 Convertible Senior Notes | Level 1 | | 224.1 |
| | 352.9 |
| | — |
| | — |
|
| $1.075 Billion 5.75% 2025 Senior Notes | Level 1 | | 1,047.2 |
| | 1,029.3 |
| | — |
| | — |
|
| $800 Million 6.25% 2040 Senior Notes | Level 1 | | 292.6 |
| | 227.1 |
| | 292.5 |
| | 234.7 |
|
| ABL Facility | Level 2 | | — |
| | — |
| | — |
| | — |
|
| Fair Value Adjustment to Interest Rate Hedge | Level 2 | | 1.4 |
| | 1.4 |
| | 1.9 |
| | 1.9 |
|
| Total long-term debt | | | $ | 2,304.2 |
| | $ | 2,346.3 |
| | $ | 2,192.6 |
| | $ | 2,224.6 |
|
The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates. The revolving loan and equipment loan facilities are variable rate interest and approximate fair value. See NOTE 5 - DEBT AND CREDIT FACILITIES for further information.
Items Measured at Fair Value on a Non-Recurring Basis
The following tables present information about the impairment charges on both financial and nonfinancial assets that were measured on a fair value basis at December 31, 2014 and December 31, 2013. The table also indicates the fair value hierarchy of the valuation techniques used to determine such fair value.
|
| | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | Year Ended December 31, 2014 |
| Description | | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Total Losses |
| Assets: | | | | | | | | | | |
Goodwill impairment -
Asia Pacific Iron Ore reporting unit | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 73.5 |
|
Other long-lived assets -
Property, plant and equipment and Mineral rights: | | | | | | | | | | |
| Asia Pacific Iron Ore reporting unit | | — |
| | — |
| | 72.4 |
| | 72.4 |
| | 526.5 |
|
| North American Coal reporting unit | | | | | | | | | | |
| CLCC thermal asset group | | — |
| | — |
| | 62.6 |
| | 62.6 |
| | 195.5 |
|
| Pinnacle asset group | | — |
| | — |
| | 30.7 |
| | 30.7 |
| | 394.5 |
|
| Oak Grove asset group | | — |
| | — |
| | 23.4 |
| | 23.4 |
| | 267.5 |
|
| Eastern Canadian Iron Ore reporting unit | | | | | | | | | | |
| Bloom Lake asset group | | — |
| | — |
| | 187.9 |
| | 187.9 |
| | 7,043.7 |
|
| Wabush asset group | | — |
| | — |
| | 42.7 |
| | 42.7 |
| | 132.6 |
|
| Ferroalloys reporting unit | | — |
| | — |
| | 12.2 |
| | 12.2 |
| | 259.5 |
|
| Other reporting units | | — |
| | — |
| | — |
| | — |
| | 19.2 |
|
Other long-lived assets -
Intangibles and other long-term assets: | | | | | | | | | | |
| Asia Pacific Iron Ore reporting unit | | — |
| | — |
| | 7.0 |
| | 7.0 |
| | 24.2 |
|
| Eastern Canadian Iron Ore reporting unit | | | | | | | | | | |
| Bloom Lake asset group | | — |
| | — |
| | — |
| | — |
| | 56.2 |
|
| Wabush asset group | | — |
| | — |
| | — |
| | — |
| | 36.7 |
|
| Ferroalloys reporting unit | | — |
| | — |
| | — |
| | — |
| | 0.3 |
|
Investment in ventures
impairment - Global Exploration | | — |
| | — |
| | — |
| | — |
| | 9.2 |
|
| | | $ | — |
| | $ | — |
| | $ | 438.9 |
| | $ | 438.9 |
| | $ | 9,039.1 |
|
Financial Assets
During the third quarter of 2014, an impairment charge of $9.2 million to investment in ventures was recorded within our Global Exploration operating segment as a decision was made to abandon the investment during the period.
Non-Financial Assets
During the third and fourth quarter of 2014, we identified factors that indicated the carrying values of the asset groups in the chart above may not be recoverable primarily due to long-term price forecasts as part of management’s long-range planning process. Updated estimates of long-term prices for all products, specifically the Platts 62 percent Fe fines spot price, which particularly effects Eastern Canadian Iron Ore and Asia Pacific Iron Ore business segments because their contracts correlate heavily to world market spot pricing, and the benchmark price for premium low-volatile hard coking coal were lower than prior estimates. These estimates were updated based upon current market conditions,
macro-economic factors influencing the balance of supply and demand for our products and expectations for future cost and capital expenditure requirements. Additionally, a new CEO, Lourenco Goncalves, was appointed by the Board of Directors in early August 2014 and subsequently identified as the CODM in accordance with ASC 280, Segment Reporting. The new CODM views Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal and Ferroalloys as non-core assets and has communicated plans to evaluate the business units for a change in strategy including possible divestiture. These factors, among other considerations utilized in the individual impairment assessments, indicate that the carrying value of the respective asset groups in the chart above and Asia Pacific Iron Ore goodwill may not be recoverable.
During the third quarter of 2014, a goodwill impairment charge of $73.5 million was recorded for our Asia Pacific Iron Ore reporting segment. Based on our review of the fair value hierarchy, the inputs used in these fair value measurements were considered Level 3 inputs.
We also recorded impairment charges to property, plant and equipment, mineral rights, intangible assets and other long-term assets during the second half of 2014 related to our Wabush operation and Bloom Lake operation within our Eastern Canadian Iron Ore operating segment, our Asia Pacific Iron Ore operating segment and our CLCC thermal operation, Oak Grove operation and Pinnacle operation within our North American Coal operating segment, along with impairments charged to reporting units within our Other reportable segments. A detailed break out of the impairment charges is shown in the chart above. The recorded impairment charges reduce the related assets to their estimated fair value as we determined that the future cash flows associated with these operations were not sufficient to support the recoverability of the carrying value of these assets. Fair value was determined based on management's best estimate within a range of fair values, which is considered a Level 3 input, and resulted in an asset impairment charge of $8,956.4 million. The Level 3 inputs used to determine fair value included models developed and market inputs obtained by management which provided a range of fair value estimates of property, plant and equipment. Management’s models include internally developed long-term future cash flow estimates, capital expenditure and cost estimates, market inputs to determine long-term pricing assumptions, discount rates, and foreign exchange rates.
|
| | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | Year Ended December 31, 2013 |
| Description | | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Total Losses |
| Assets: | | | | | | | | | | |
Goodwill impairment -
Ferroalloys reporting unit | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 80.9 |
|
Other long-lived assets -
Property, plant and equipment | | — |
| | — |
| | 46.3 |
| | 46.3 |
| | 155.4 |
|
Other long-lived assets -
Intangibles and long-term deposits | | — |
| | — |
| | 1.6 |
| | 1.6 |
| | 14.5 |
|
| Investment in ventures impairment - Amapá | | — |
| | — |
| | — |
| | — |
| | 67.6 |
|
| Total | | $ | — |
| | $ | — |
| | $ | 47.9 |
| | $ | 47.9 |
| | $ | 318.4 |
|
Financial Assets
In light of the March 28, 2013 collapse of the Santana port shiploader and subsequent evaluation of the effect that this event had on the carrying value of our investment in Amapá as of June 30, 2013, we recorded an impairment charge of $67.6 million in the second quarter of 2013. The sale of Amapá was completed in the fourth quarter of 2013.
Non-Financial Assets
During the fourth quarter of 2013, a goodwill impairment charge of $80.9 million was recorded for our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment. The impairment charge was primarily a result of the decision to indefinitely suspend the Chromite Project and to not allocate additional capital for the project given the uncertain timeline and risks associated with the development of necessary infrastructure to bring the project online. Based on our review of the fair value hierarchy, the inputs used in these fair value measurements were considered Level 3 inputs.
We also recorded an impairment charges to property, plant and equipment during 2013 related to our Wabush operation within our Eastern Canadian Iron Ore operating segment, our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Other reportable segments and certain mineral lands at our Asia Pacific Iron Ore operating segment to reduce the related assets to their estimated fair value as we determined that the cash flows associated with these operations were not sufficient to support the recoverability of the carrying value of these assets. Fair value was determined based on management's estimate of liquidation value, which is considered a Level 3 input, and resulted in a charge of $155.4 million.
NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit plans, primarily consisting of retiree healthcare benefits, to most employees in North Americathe U.S. as part of a total compensation and benefits program. We do not have employee retirement benefit obligations at our Asia Pacific Iron Ore operations or our Bloom Lake mine operations within our Eastern Canadian Iron Ore segment. The defined benefit pension plans largely are noncontributory and benefits generally are based on employees’ years of service and average earnings for a defined period prior to retirement or a minimum formula.
The labor agreements we We do not have with the USWemployee retirement benefit obligations at our U.S.Asia Pacific Iron Ore operations cover approximately 2,200 USW-represented employees at our Empire and Tilden mines in Michigan and our United Taconite and Hibbing mines in Minnesota, or 40.9 percentoperations.
We offer retiree medical coverage to hourly retirees of our total workforce.USW-represented mines. The 20122015 USW agreement sets temporaryset fixed monthly postretirement OPEB capsmedical premiums for participants who retireretired prior to January 1, 2015. These premium maximumsfixed premiums will expire at the end of the contract periodon December 31, 2018 and revert to increasing premiums based on the terms of the 2004 bargaining agreement.a cost-sharing formula. The agreements also provide for an OPEB cap that will limitlimits the amount of contributions that we have to make toward retiree medical insurance coverage for each retiree and spouse of a retiree per calendar year who retired on or after it goes into effect.January 1, 2015. The amount of the annual OPEB cap will beis based upon the gross plan costs we incurred in 2014. The OPEB cap applies to employees who retire on or after January 1, 2015 and willdoes not apply to surviving spouses.
The 2015 USW agreement also eliminates retiree medical coverage for USW-represented employees hired after September 1, 2016. In addition, the agreements renewed the lump sum special payments for certainlieu of retiree medical coverage, USW-represented employees retiring in the near future.hired after September 1, 2016 will receive a 401(k) contribution of $0.50 per hour worked to a restricted Retiree Health Care Account.
In addition, we currently provide various levels of retirement health care and OPEB to mostsome full-time employees who meet certain length of service and age requirements (a portion of which is pursuant to collective bargaining agreements). Most plans require retiree contributions and have deductibles, co-pay requirements and benefit limits. Most bargaining unit plans require retiree contributions and co-pays for major medical and prescription drug coverage. There is an annual limita cap on our cost for medical coverage under the U.S. salaried plans. The annual limit applies to each covered participant and equals $7,000 for coverage prior to age 65 and $3,000 for coverage after age 65, with the retiree’s participation adjusted based on the age at which the retiree’s benefits commence. Beginning in 2015, Cliffs is changingwe changed the delivery of the post-65 salaried retiree medical benefit program, including salaried retirees from our Northshore operation, from an employer sponsored plan to the combination of an employer subsidy plan and an individual supplemental Medicare insurance plan purchased through a Medicare exchange. This allows the program to take full advantage of available government subsidies and more efficient pricing in the Medicare market. For participants at our Northshore operation, the annual limit ranges from $4,020 to $4,500 for coverage prior to age 65, and equals $2,000 for coverage after age 65. Covered participants pay an amount for coverage equal to the excess of (i) the average cost of coverage for all covered participants, over (ii) the participant’s individual limit, but in no event will the participant’s cost be less than 15.0 percent15.0% of the average cost of coverage for all covered participants. For Northshore participants, the minimum participant cost is a fixed dollar amount. We do not provide OPEB for most U.S. salaried employees hired after January 1, 1993. Retiree healthcare coverage is provided through programs administered by insurance companies whose charges are based on benefits paid.
Our North American Coal segment is required under an agreement with the UMWA to contribute to the UMWA 1974 Pension Trust based principally on hours worked by UMWA-represented employees. This agreement covers approximately 800 UMWA-represented employees at our Pinnacle Complex in West Virginia and our Oak Grove mine in Alabama, or 15.2 percent of our total workforce. The multi-employer pension trust provides pension benefits to eligible retirees through a defined benefit plan. The UMWA 1993 Benefit Plan is a defined contribution plan that was created as
the result of negotiations for the NBCWA of 1993. The plan provides healthcare insurance to orphan UMWA retirees who are not eligible to participate in the UMWA Combined Benefit Fund or the 1992 Benefit Fund or whose last employer signed the 1993 or later NBCWA and who subsequently goes out of business. Contributions to the trust were at a rate of $8.16 per hour worked 2014 and at a rate of $8.10 per hour worked for both 2013 and 2012. These amounted to $13.8 million in 2014 and $14.9 million in both 2013 and 2012, respectively. Our Pinnacle and Oak Grove mines are signatorieswere sold in December 2015, and the liabilities representing vested salaried pension benefits at the time of the sale remained with Cliffs. The sale triggered a curtailment event for the Salaried Pension Plan. Liabilities for other postretirement benefits were transferred as part of the sale, and associated adjustments were made to labor agreements with the UMWA, making themAccumulated other comprehensive loss balances as they pertained to Pinnacle and Oak Grove participants in the UMWA 1974 Pension Plan (the "1974 PP"). AsHourly OPEB plan. Accordingly, all amounts shown below include retained obligations of vested employees of the most recent estimate, PinnacleNorth American Coal mines. Further, all disclosures presented include the annual expense, contributions and Oak Grove's combined share of this underfunded liability was estimated to be approximately $330 million. If Pinnacle or Oak Grove were to withdraw from the 1974 PP or if a mass withdrawal were to occur, we would become obligated to satisfy our withdrawal liability to the 1974 PP.
In December 2003, The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 was enacted. This act introduced a prescription drug benefit under Medicare Part D as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that at least actuarially is equivalent to Medicare Part D. Our measures of the accumulated postretirement benefit obligation and net periodic postretirement benefit cost as of December 31, 2004 and for periods thereafter reflect amountsobligations associated with the subsidy. We elected to adopt the retroactive transition method for recognizing the cost reduction in 2004.
The shut-down of the Wabush Scully mine on October 31, 2014 and the idling at Bloom Lake as of December 31, 2014 affected employees of both the Wabush Scully mine and Pointe Noire locations, triggering early retirement benefits for those hourly and salaried plan participants who were eligible, and termination ofretained vested benefits of other participants who were not eligible. Curtailment gains related to these events totaled $7.9 million and were fully recognized in net periodic benefit cost in 2014.participants.
The following table summarizes the annual expense (income) recognized related to the retirement plans for 2014, 20132017, 2016 and 2012:2015:
| | | | (In Millions) | (In Millions) |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Defined benefit pension plans | $ | 31.3 |
| | $ | 52.1 |
| | $ | 55.2 |
| $ | 18.0 |
| | $ | 16.5 |
| | $ | 23.9 |
|
| Defined contribution pension plans | 6.3 |
| | 6.8 |
| | 6.7 |
| 2.9 |
| | 2.8 |
| | 3.6 |
|
| Other postretirement benefits | (0.7 | ) | | 17.4 |
| | 28.1 |
| (6.1 | ) | | (4.0 | ) | | 4.4 |
|
| Total | $ | 36.9 |
| | $ | 76.3 |
| | $ | 90.0 |
| $ | 14.8 |
| | $ | 15.3 |
| | $ | 31.9 |
|
The following tables and information provide additional disclosures for our consolidated plans.
Obligations and Funded Status
The following tables and information provide additional disclosures for the years ending December 31, 20142017 and 2013:2016:
| | | | (In Millions) | (In Millions) |
| | Pension Benefits | | Other Benefits | Pension Benefits | | Other Benefits |
| Change in benefit obligations: | 2014 | | 2013 | | 2014 | | 2013 | 2017 | | 2016 | | 2017 | | 2016 |
| Benefit obligations — beginning of year | $ | 1,118.0 |
| | $ | 1,244.3 |
| | $ | 356.2 |
| | $ | 459.8 |
| $ | 931.6 |
| | $ | 910.8 |
| | $ | 264.6 |
| | $ | 266.0 |
|
| Service cost (excluding expenses) | 30.8 |
| | 38.9 |
| | 6.7 |
| | 12.3 |
| 17.1 |
| | 17.6 |
| | 1.8 |
| | 1.7 |
|
| Interest cost | 49.7 |
| | 45.9 |
| | 16.2 |
| | 17.3 |
| 30.5 |
| | 30.3 |
| | 8.3 |
| | 9.1 |
|
| Plan amendments | — |
| | 0.8 |
| | (0.9 | ) | | — |
| — |
| | 5.7 |
| | — |
| | 9.8 |
|
| Actuarial (gain) loss | 141.6 |
| | (121.8 | ) | | 51.9 |
| | (103.3 | ) | 54.6 |
| | 38.1 |
| | 7.4 |
| | (7.2 | ) |
| Benefits paid | (87.0 | ) | | (72.9 | ) | | (27.4 | ) | | (28.0 | ) | (60.7 | ) | | (70.9 | ) | | (21.4 | ) | | (21.3 | ) |
| Participant contributions | — |
| | — |
| | 4.8 |
| | 5.6 |
| — |
| | — |
| | 4.6 |
| | 6.0 |
|
| Federal subsidy on benefits paid | — |
| | — |
| | 0.9 |
| | 0.5 |
| — |
| | — |
| | 0.6 |
| | 0.5 |
|
| Exchange rate gain | (18.2 | ) | | (17.2 | ) | | (3.7 | ) | | (8.0 | ) | |
| Curtailment gain | (10.9 | ) | | — |
| | (8.8 | ) | | — |
| |
| Special termination benefits | 3.4 |
| | — |
| | — |
| | — |
| |
| Benefit obligations — end of year | $ | 1,227.4 |
| | $ | 1,118.0 |
| | $ | 395.9 |
| | $ | 356.2 |
| $ | 973.1 |
| | $ | 931.6 |
| | $ | 265.9 |
| | $ | 264.6 |
|
| | | | | | | | | | | | | | | |
| Change in plan assets: | | | | | | | | | | | | | | |
| Fair value of plan assets — beginning of year | $ | 915.3 |
| | $ | 838.7 |
| | $ | 251.8 |
| | $ | 237.0 |
| $ | 685.8 |
| | $ | 700.6 |
| | $ | 253.0 |
| | $ | 250.6 |
|
| Actual return on plan assets | 78.7 |
| | 109.5 |
| | 31.9 |
| | 11.0 |
| 100.2 |
| | 54.8 |
| | 24.2 |
| | 16.0 |
|
| Participant contributions | — |
| | — |
| | 0.8 |
| | 1.8 |
| — |
| | — |
| | 0.3 |
| | 0.5 |
|
| Employer contributions | 60.5 |
| | 53.7 |
| | 6.9 |
| | 20.7 |
| 24.4 |
| | 1.2 |
| | 1.7 |
| | 1.7 |
|
| Asset transfers | | 0.1 |
| | 0.1 |
| | — |
| | — |
|
| Benefits paid | (87.0 | ) | | (72.9 | ) | | (22.1 | ) | | (18.7 | ) | (60.7 | ) | | (70.9 | ) | | (16.7 | ) | | (15.8 | ) |
| Exchange rate loss | (17.9 | ) | | (13.7 | ) | | — |
| | — |
| |
| Fair value of plan assets — end of year | $ | 949.6 |
| | $ | 915.3 |
| | $ | 269.3 |
| | $ | 251.8 |
| $ | 749.8 |
| | $ | 685.8 |
| | $ | 262.5 |
| | $ | 253.0 |
|
| | | | | | | | | | | | | | | |
| Funded status at December 31: | | | | | | | | | | | | | | |
| Fair value of plan assets | $ | 949.6 |
| | $ | 915.3 |
| | $ | 269.3 |
| | $ | 251.8 |
| $ | 749.8 |
| | $ | 685.8 |
| | $ | 262.5 |
| | $ | 253.0 |
|
| Benefit obligations | (1,227.4 | ) | | (1,118.0 | ) | | (395.9 | ) | | (356.2 | ) | (973.1 | ) | | (931.6 | ) | | (265.9 | ) | | (264.6 | ) |
| Funded status (plan assets less benefit obligations) | $ | (277.8 | ) | | $ | (202.7 | ) | | $ | (126.6 | ) | | $ | (104.4 | ) | |
| Amount recognized at December 31 | $ | (277.8 | ) | | $ | (202.7 | ) | | $ | (126.6 | ) | | $ | (104.4 | ) | $ | (223.3 | ) | | $ | (245.8 | ) | | $ | (3.4 | ) | | $ | (11.6 | ) |
| | | | | | | | | | | | | | | |
| Amounts recognized in Statements of Financial Position: | | | | | | | | | | | | | | |
| Noncurrent assets | | $ | — |
| | $ | — |
| | $ | 35.4 |
| | $ | 27.3 |
|
| Current liabilities | $ | (2.4 | ) | | $ | (5.2 | ) | | $ | (6.8 | ) | | $ | (7.9 | ) | (0.5 | ) | | (0.1 | ) | | (3.9 | ) | | (4.1 | ) |
| Noncurrent liabilities | (275.4 | ) | | (197.5 | ) | | (119.8 | ) | | (96.5 | ) | (222.8 | ) | | (245.7 | ) | | (34.9 | ) | | (34.8 | ) |
| Total amount recognized | | $ | (223.3 | ) | | $ | (245.8 | ) | | $ | (3.4 | ) | | $ | (11.6 | ) |
| | | | | | | | | |
| Amounts recognized in accumulated other comprehensive loss: | | | | | | | | |
| Net actuarial loss | | $ | 318.7 |
| | $ | 315.9 |
| | $ | 88.3 |
| | $ | 87.0 |
|
| Prior service cost (credit) | | 8.8 |
| | 11.0 |
| | (25.6 | ) | | (26.9 | ) |
| Net amount recognized | $ | (277.8 | ) | | $ | (202.7 | ) | | $ | (126.6 | ) | | $ | (104.4 | ) | $ | 327.5 |
| | $ | 326.9 |
| | $ | 62.7 |
| | $ | 60.1 |
|
| | | | | | | | | | | | | | | |
| Amounts recognized in accumulated other comprehensive income: | | | | | | | | |
| The estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2018: | | | | | | | | |
| Net actuarial loss | $ | 341.5 |
| | $ | 230.6 |
| | $ | 97.1 |
| | $ | 67.0 |
| $ | 21.1 |
| | | | $ | 4.9 |
| | |
| Prior service cost | 10.6 |
| | 14.9 |
| | (42.9 | ) | | (45.4 | ) | |
| Prior service cost (credit) | | 2.2 |
| | | | (3.0 | ) | | |
| Net amount recognized | $ | 352.1 |
| | $ | 245.5 |
| | $ | 54.2 |
| | $ | 21.6 |
| $ | 23.3 |
| | | | $ | 1.9 |
| | |
| | | | | | | | | |
| The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2015: | | | | | | | | |
| Net actuarial loss | $ | 22.3 |
| | | | $ | 6.3 |
| | | |
| Prior service cost | 2.4 |
| | | | (3.7 | ) | | | |
| Net amount recognized | $ | 24.7 |
| | | | $ | 2.6 |
| | | |
| | | | (In Millions) | (In Millions) |
| | 2014 | 2017 |
| | Pension Plans | | Other Benefits | Pension Plans | | Other Benefits |
| | Salaried | | Hourly | | Mining | | SERP | | Total | | Salaried | | Hourly | | Total | Salaried | | Hourly | | Mining | | SERP | | Total | | Salaried | | Hourly | | Total |
| Fair value of plan assets | $ | 366.4 |
| | $ | 576.6 |
| | $ | 6.6 |
| | $ | — |
| | $ | 949.6 |
| | $ | — |
| | $ | 269.3 |
| | $ | 269.3 |
| $ | 269.4 |
| | $ | 473.0 |
| | $ | 7.4 |
| | $ | — |
| | $ | 749.8 |
| | $ | — |
| | $ | 262.5 |
| | $ | 262.5 |
|
| Benefit obligation | (471.4 | ) | | (739.2 | ) | | (9.2 | ) | | (7.6 | ) | | (1,227.4 | ) | | (54.0 | ) | | (341.9 | ) | | (395.9 | ) | (368.0 | ) | | (590.0 | ) | | (10.3 | ) | | (4.8 | ) | | (973.1 | ) | | (37.7 | ) | | (228.2 | ) | | (265.9 | ) |
| Funded status | $ | (105.0 | ) | | $ | (162.6 | ) | | $ | (2.6 | ) | | $ | (7.6 | ) | | $ | (277.8 | ) | | $ | (54.0 | ) | | $ | (72.6 | ) | | $ | (126.6 | ) | $ | (98.6 | ) | | $ | (117.0 | ) | | $ | (2.9 | ) | | $ | (4.8 | ) | | $ | (223.3 | ) | | $ | (37.7 | ) | | $ | 34.3 |
| | $ | (3.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2013 | 2016 |
| | Pension Plans | | Other Benefits | Pension Plans | | Other Benefits |
| | Salaried | | Hourly | | Mining | | SERP | | Total | | Salaried | | Hourly | | Total | Salaried | | Hourly | | Mining | | SERP | | Total | | Salaried | | Hourly | | Total |
| Fair value of plan assets | $ | 357.4 |
| | $ | 552.7 |
| | $ | 5.2 |
| | $ | — |
| | $ | 915.3 |
| | $ | — |
| | $ | 251.8 |
| | $ | 251.8 |
| $ | 242.9 |
| | $ | 436.9 |
| | $ | 6.0 |
| | $ | — |
| | $ | 685.8 |
| | $ | — |
| | $ | 253.0 |
| | $ | 253.0 |
|
| Benefit obligation | (427.2 | ) | | (674.8 | ) | | (6.8 | ) | | (9.2 | ) | | (1,118.0 | ) | | (53.6 | ) | | (302.6 | ) | | (356.2 | ) | (351.9 | ) | | (565.6 | ) | | (10.0 | ) | | (4.1 | ) | | (931.6 | ) | | (37.6 | ) | | (227.0 | ) | | (264.6 | ) |
| Funded status | $ | (69.8 | ) | | $ | (122.1 | ) | | $ | (1.6 | ) | | $ | (9.2 | ) | | $ | (202.7 | ) | | $ | (53.6 | ) | | $ | (50.8 | ) | | $ | (104.4 | ) | $ | (109.0 | ) | | $ | (128.7 | ) | | $ | (4.0 | ) | | $ | (4.1 | ) | | $ | (245.8 | ) | | $ | (37.6 | ) | | $ | 26.0 |
| | $ | (11.6 | ) |
The accumulated benefit obligation for all defined benefit pension plans was $1,204.4$963.0 million and $1,091.4$922.0 million at December 31, 20142017 and 2013,2016, respectively. The increase in the accumulated benefit obligation primarily is a result of a decrease in the discount rates and adoption of the updated RP-2014 mortality tables.rates.
Components of Net Periodic Benefit Cost
| | | | (In Millions) | (In Millions) |
| | Pension Benefits | | Other Benefits | Pension Benefits | | Other Benefits |
| | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Service cost | $ | 30.8 |
| | $ | 38.9 |
| | $ | 32.0 |
| | $ | 6.7 |
| | $ | 12.3 |
| | $ | 14.7 |
| $ | 17.1 |
| | $ | 17.6 |
| | $ | 22.7 |
| | $ | 1.8 |
| | $ | 1.7 |
| | $ | 6.4 |
|
| Interest cost | 49.7 |
| | 45.9 |
| | 48.4 |
| | 16.2 |
| | 17.3 |
| | 20.6 |
| 30.5 |
| | 30.3 |
| | 37.7 |
| | 8.3 |
| | 9.1 |
| | 13.4 |
|
| Expected return on plan assets | (72.3 | ) | | (65.6 | ) | | (59.5 | ) | | (17.1 | ) | | (20.1 | ) | | (17.7 | ) | (54.5 | ) | | (54.7 | ) | | (59.8 | ) | | (17.7 | ) | | (17.1 | ) | | (18.3 | ) |
| Amortization: |
| |
| |
| |
| |
| |
|
| |
| |
| |
| |
| |
|
| Net asset | — |
| | — |
| | — |
| | — |
| | — |
| | (3.0 | ) | |
| Prior service costs (credits) | 2.7 |
| | 3.0 |
| | 3.9 |
| | (3.6 | ) | | (3.6 | ) | | 1.9 |
| 2.6 |
| | 2.2 |
| | 2.3 |
| | (3.0 | ) | | (3.7 | ) | | (3.7 | ) |
| Net actuarial loss | 14.1 |
| | 29.9 |
| | 30.4 |
| | 5.0 |
| | 11.5 |
| | 11.6 |
| 22.3 |
| | 21.1 |
| | 20.8 |
| | 4.5 |
| | 6.0 |
| | 6.6 |
|
| Curtailments and settlements | 2.9 |
| | — |
| | — |
| | (7.9 | ) | | — |
| | — |
| — |
| | — |
| | 0.2 |
| | — |
| | — |
| | — |
|
| Special termination benefits | 3.4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Net periodic benefit cost | $ | 31.3 |
| | $ | 52.1 |
| | $ | 55.2 |
| | $ | (0.7 | ) | | $ | 17.4 |
| | $ | 28.1 |
| |
| Net periodic benefit cost (credit) | | $ | 18.0 |
| | $ | 16.5 |
| | $ | 23.9 |
| | $ | (6.1 | ) | | $ | (4.0 | ) | | $ | 4.4 |
|
| Curtailment effects | — |
| | — |
| | — |
| | (0.8 | ) | | — |
| | — |
| — |
| | — |
| | (1.2 | ) | | — |
| | — |
| | — |
|
| Current year actuarial (gain)/loss | 121.8 |
| | (168.8 | ) | | 53.1 |
| | 36.9 |
| | (95.2 | ) | | 3.2 |
| |
| Current year actuarial loss (gain) | | 9.3 |
| | 37.8 |
| | (0.7 | ) | | 1.2 |
| | (8.1 | ) | | 0.2 |
|
| Amortization of net loss | (15.5 | ) | | (29.9 | ) | | (30.4 | ) | | (5.0 | ) | | (11.5 | ) | | (11.6 | ) | (22.3 | ) | | (21.1 | ) | | (21.0 | ) | | (4.5 | ) | | (6.0 | ) | | (6.6 | ) |
| Current year prior service (credit) cost | (1.5 | ) | | 0.8 |
| | 2.8 |
| | (0.9 | ) | | — |
| | (58.3 | ) | |
| Amortization of prior service (cost) credit | (2.7 | ) | | (3.0 | ) | | (3.9 | ) | | 3.6 |
| | 3.6 |
| | (1.9 | ) | |
| Amortization of transition asset | — |
| | — |
| | — |
| | — |
| | — |
| | 3.0 |
| |
| Total recognized in other comprehensive income | $ | 102.1 |
| | $ | (200.9 | ) | | $ | 21.6 |
| | $ | 33.8 |
| | $ | (103.1 | ) | | $ | (65.6 | ) | |
Total recognized in net periodic cost and other comprehensive income | $ | 133.4 |
| | $ | (148.8 | ) | | $ | 76.8 |
| | $ | 33.1 |
| | $ | (85.7 | ) | | $ | (37.5 | ) | |
| Current year prior service cost | | — |
| | 5.7 |
| | — |
| | — |
| | 9.8 |
| | — |
|
| Amortization of prior service credit (cost) | | (2.6 | ) | | (2.2 | ) | | (2.3 | ) | | 3.0 |
| | 3.7 |
| | 3.7 |
|
| Total recognized in other comprehensive income (loss) | | $ | (15.6 | ) | | $ | 20.2 |
| | $ | (25.2 | ) | | $ | (0.3 | ) | | $ | (0.6 | ) | | $ | (2.7 | ) |
Total recognized in net periodic cost and other comprehensive income (loss) | | $ | 2.4 |
| | $ | 36.7 |
| | $ | (1.3 | ) | | $ | (6.4 | ) | | $ | (4.6 | ) | | $ | 1.7 |
|
Additional Information
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| | Pension Benefits | | Other Benefits |
| | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 |
| Effect of change in mine ownership & noncontrolling interest | $ | 51.4 |
| | $ | 46.5 |
| | $ | 54.8 |
| | $ | 5.9 |
| | $ | 4.8 |
| | $ | 8.6 |
|
| Actual return on plan assets | 78.7 |
| | 109.5 |
| | 92.5 |
| | 31.9 |
| | 11.0 |
| | 26.1 |
|
Assumptions
For our U.S. pension and other postretirement benefit plans, we used aThe discount rate for determining PBO is determined individually for each plan as of December 31, 2014 of 3.83 percent, compared with a discount rate of 4.57 percent as of December 31, 2013.noted in the assumption chart below. The U.S. discount rates are determined by matching the projected cash flows used to determine the PBO and APBO to a projected yield curve of 715623 Aa graded bonds in the 10th40th to 90th90th percentiles. These bonds are either noncallable or callable with make-whole provisions. The duration matching produceddecreases in discount rates rangingdue to market conditions resulted in increases of $46.1 million and $12.6 million for the pension and other postretirement benefit plans, respectively, to the plans PBO.
Effective January 1, 2016, we changed the approach used to calculate the service and interest components of net periodic benefit cost. Previously, we calculated the service and interest components utilizing a single weighted-average discount rate derived from 3.72 percentthe yield curve used to 3.92 percentmeasure the PBO. We have elected an alternative approach that utilizes a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. The change resulted in a decrease to our net periodic benefit cost of $8.2 million and $1.8 million for our plans. Based upon these results, we selected apension plans and OPEB plans, respectively for the year ended December 31, 2014 discount rate of 3.83 percent for our plans. This methodology is consistent with the calculation of the prior-year discount rate.2016.
On December 31, 2014, we adopted2017, the assumed mortality improvement projection was changed from generational scale MP-2016 to generational scale MP-2017. The healthy mortality assumption remains the RP-2014 mortality tables projected generationally using scale MP-2014 with blue collar adjustments for the Iron Hourly and Hourly PRW plans, with white collar adjustments made for certain hourlythe SERP and salaried groups, to determineSalaried PRW Plan, and without collar adjustments for the expected life of our plan participants, replacing the IRS 2014 prescribed mortality tables for our U.S. plans.Salaried and Ore Mining. The adoption of the new tablesprojection scale resulted in increasesdecreases to our U.S. plan projected benefit obligationsPBO totaling approximately $30.0$6.1 million or 4 percent percent0.6% for the pension plans and $20$1.9 million or 7 percent0.7% for the OPEB plans.
For our Canadian plans, we used a discount rate as ofOn December 31, 20142016, the assumed mortality improvement projection was changed from generational scale MP-2015 to generational scale MP-2016. The healthy mortality assumption remains the RP-2014 mortality tables with blue collar adjustments for the Iron Hourly and Hourly PRW plans, with white collar adjustments for the SERP and Salaried PRW Plan, and without collar adjustments for the Salaried and Ore Mining. The adoption of 3.75 percentthe new projection scale resulted in decreases to our PBO totaling $13.1 million or 1.4% for the pension plans and the other postretirement benefit plans. Similar to the U.S. plans, the Canadian discount rates are determined by matching the projected cash flows used to determine the PBO and APBO to a projected yield curve of 285 corporate bonds in the 10th to 90th percentiles. The corporate bonds are either Aa graded, or (for maturities of 10 or more years) A or Aaa graded with an appropriate credit spread adjustment. These bonds are either noncallable or callable with make whole provisions. This methodology is consistent with the calculation of the prior-year discount rate.
On December 31, 2014, we adopted the 2014 Private Sector Canadian Pensioners’ Mortality Table for the hourly plans and the 2014 Canadian Pensioners’ Mortality Table for the salaried plans, where both tables were projected generationally using scale CPM-B, replacing the UP 1994 table with full projection. The adoption of the new tables resulted in increases to our Canadian plan projected benefit obligations totaling approximately $12$4.9 million or 5 percent for the pension plans and $3 million or 5 percent1.8% for the OPEB plans.
Weighted-average assumptions used to determine benefit obligations at December 31 were:
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| | | | | | | |
| | Pension Benefits | | Other Benefits |
| | 2014 | | 2013 | | 2014 | | 2013 |
| U.S. plan discount rate | 3.83% | | 4.57% | | 3.83% | | 4.57% |
| Canadian plan discount rate | 3.75 | | 4.50 | | 3.75 | | 4.75 |
| U.S. salaried rate of compensation increase | 3.00 | | 4.00 | | 3.00 | | 4.00 |
| Canadian rate of compensation increase | 3.00 | | 4.00 | | N/A | | N/A |
| Hourly rate of compensation increase (ultimate) | 2.50 | | 3.00 | | N/A | | N/A |
| U.S. expected return on plan assets | 8.25 | | 8.25 | | 7.00 | | 7.00 |
| Canadian expected return on plan assets | 7.25 | | 7.25 | | N/A | | N/A |
|
| | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Discount rate | | | | | | | | | | | |
| Iron Hourly Pension Plan | 3.60 | % | | 4.02 | % | | N/A | % | | N/A | % |
| Salaried Pension Plan | 3.52 | | | 3.92 | | | N/A | | | N/A | |
| Ore Mining Pension Plan | 3.61 | | | 4.04 | | | N/A | | | N/A | |
| SERP | 3.50 | | | 3.90 | | | N/A | | | N/A | |
| Hourly OPEB Plan | N/A | | | N/A | | | 3.60 | | | 4.02 | |
| Salaried OPEB Plan | N/A | | | N/A | | | 3.57 | | | 3.99 | |
| Salaried rate of compensation increase | 3.00 | | | 3.00 | | | 3.00 | | | 3.00 | |
| Hourly rate of compensation increase | 2.00 | | | 2.00 | | | N/A | | | N/A | |
Weighted-average assumptions used to determine net benefit cost for the years 2014, 20132017, 2016 and 20122015 were:
|
| | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits | |
| | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | |
| U.S. plan discount rate | 4.57 | % | 3.70 | % | 4.28 | % | 4.57 | % | 3.70 | % | 4.28/3.51 | % 1 |
| Canadian plan discount rate | 4.50 | | 3.75 | | 4.00 | | 4.75 | | 4.00 | | 4.25 | |
| U.S. expected return on plan assets | 8.25 | | 8.25 | | 8.25 | | 7.00 | | 8.25 | | 8.25 | |
| Canadian expected return on plan assets | 7.25 | | 7.25 | | 7.25 | | N/A | | N/A | | N/A | |
| U.S. salaried rate of compensation increase | 4.00 | | 4.00 | | 4.00 | | 4.00 | | 4.00 | | 4.00 | |
| U.S. hourly rate of compensation increase | 3.00 | | 4.00 | | 4.00 | | 4.00 | | 4.00 | | 4.00 | |
| Canadian rate of compensation increase | 4.00 | | 4.00 | | 4.00 | | 4.00 | | 4.00 | | 4.00 | |
|
| | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Obligation Discount Rate | | | | | | | | | | | | | | | | | |
| Iron Hourly Pension Plan | 4.02 | % | | 4.27 | % | | 3.83 | % | | N/A | % | | N/A | % | | N/A | % |
| Salaried Pension Plan | 3.91 | | | 4.13 | | | 3.83 | | | N/A | | | N/A | | | N/A | |
| Ore Mining Pension Plan | 4.04 | | | 4.28 | | | 3.83 | | | N/A | | | N/A | | | N/A | |
| SERP | 3.90 | | | 4.01 | | | 3.83 | | | N/A | | | N/A | | | N/A | |
| Hourly OPEB Plan | N/A | | | N/A | | | N/A | | | 4.03 | | | 4.32 | | | 3.83 | |
| Salaried OPEB Plan | N/A | | | N/A | | | N/A | | | 3.98 | | | 4.22 | | | 3.83 | |
| Service Cost Discount Rate | | | | | | | | | | | | | | | | | |
| Iron Hourly Pension Plan | 4.30 | | | 4.66 | | | 3.83 | | | N/A | | | N/A | | | N/A | |
| Salaried Pension Plan | 3.93 | | | 4.14 | | | 3.83 | | | N/A | | | N/A | | | N/A | |
| Ore Mining Pension Plan | 4.27 | | | 4.60 | | | 3.83 | | | N/A | | | N/A | | | N/A | |
| SERP | 3.69 | | | 3.87 | | | 3.83 | | | N/A | | | N/A | | | N/A | |
| Hourly OPEB Plan | N/A | | | N/A | | | N/A | | | 4.23 | | | 4.56 | | | 3.83 | |
| Salaried OPEB Plan | N/A | | | N/A | | | N/A | | | 4.30 | | | 4.63 | | | 3.83 | |
| Interest Cost Discount Rate | | | | | | | | | | | | | | | | | |
| Iron Hourly Pension Plan | 3.38 | | | 3.46 | | | 3.83 | | | N/A | | | N/A | | | N/A | |
| Salaried Pension Plan | 3.21 | | | 3.21 | | | 3.83 | | | N/A | | | N/A | | | N/A | |
| Ore Mining Pension Plan | 3.41 | | | 3.48 | | | 3.83 | | | N/A | | | N/A | | | N/A | |
| SERP | 3.36 | | | 3.30 | | | 3.83 | | | N/A | | | N/A | | | N/A | |
| Hourly OPEB Plan | N/A | | | N/A | | | N/A | | | 3.24 | | | 3.48 | | | 3.83 | |
| Salaried OPEB Plan | N/A | | | N/A | | | N/A | | | 3.28 | | | 3.31 | | | 3.83 | |
| | | | | | | | | | | | | | | | | | |
| Expected return on plan assets | 8.25 | | | 8.25 | | | 8.25 | | | 7.00 | | | 7.00 | | | 7.00 | |
| Salaried rate of compensation increase | 3.00 | | | 3.00 | | | 3.00 | | | 3.00 | | | 3.00 | | | 3.00 | |
| Hourly rate of compensation increase | 2.00 | | | 2.00 | | | 2.50 | | | N/A | | | N/A | | | N/A | |
| |
1
| 4.28 percent for the Salaried Plan. For the Hourly Plan, 4.28 percent from January 1, 2012 through October 31, 2012, and 3.51 percent from November 1, 2012 through December 31, 2012. |
Assumed health care cost trend rates at December 31 were:
|
| | | | |
| | 2014 | | 2013 | |
| U.S. plan health care cost trend rate assumed for next year | 7.00 | % | 7.25 | % |
| Canadian plan health care cost trend rate assumed for next year | 4.25 | | 4.00 | |
| Ultimate health care cost trend rate | 5.00 | | 5.00 | |
| U.S. plan year that the ultimate rate is reached | 2023 | | 2023 | |
| Canadian plan year that the ultimate rate is reached | 2018 | | 2018 | |
|
| | | | | |
| | 2017 | | 2016 |
| Health care cost trend rate assumed for next year | 7.00 | % | | 6.50 | % |
| Ultimate health care cost trend rate | 5.00 | | | 5.00 | |
| Year that the ultimate rate is reached | 2026 | | | 2023 | |
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A change of one percentage point in assumed health care cost trend rates would have the following effects:
| | | | (In Millions) | (In Millions) |
| | Increase | | Decrease | Increase | | Decrease |
| Effect on total of service and interest cost | $ | 3.4 |
| | $ | (2.7 | ) | $ | 1.0 |
| | $ | (0.8 | ) |
| Effect on postretirement benefit obligation | 49.6 |
| | (39.9 | ) | 21.2 |
| | (17.6 | ) |
Plan Assets
Our financial objectives with respect to our pension and VEBA plan assets are to fully fund the actuarial accrued liability for each of the plans, to maximize investment returns within reasonable and prudent levels of risk, and to maintain sufficient liquidity to meet benefit obligations on a timely basis.
Our investment objective is to outperform the expected ROA assumption used in the plans’ actuarial reports over a full market cycle, which is considered a period during which the U.S. economy experienceslife of the effects of both an upturn and a downturn in the level of economic activity. In general, these periods tend to last between three and five years.plans. The expected ROA takes into account historical returns and estimated future long-term returns based on capital market assumptions applied to the asset allocation strategy. The expected return is net of investment expenses paid by the plans. In addition, investment performance is monitored on a quarterly basis by benchmarking to various indices and metrics for the one-, three- and five-year periods.
The asset allocation strategy is determined through a detailed analysis of assets and liabilities by plan, which defines the overall risk that is acceptable with regard to the expected level and variability of portfolio returns, surplus (assets compared to liabilities), contributions and pension expense.
The asset allocation review process involves simulating the effect of financialcapital market behaviors including global asset class performance, forinflation and interest rates in order to evaluate various asset allocation scenarios and determine the asset mix with the highest likelihood of meeting financial objectives. The process includes factoring in the current funded status and likely future funded status levels of the plans by taking into account expected growth or decline in the contributions over time. The modeling is then adjusted by simulating unexpected changes in inflation and interest rates. The process also includes quantifying the effect of investment performance and
simulated changes to future levels of contributions, determining the appropriate asset mix with the highest likelihood of meeting financial objectives and regularly reviewing our asset allocation strategy.
The asset allocation strategy varies by plan. The following table reflects the actual asset allocations for pension and VEBA plan assets as of December 31, 20142017 and 2013,2016, as well as the 20152018 weighted average target asset allocations as of December 31, 2014.allocations. Equity investments include securities in large-cap, mid-cap and small-cap companies located in the U.S. and worldwide. Fixed income investments primarily include corporate bonds and government debt securities. Alternative investments include hedge funds, private equity, structured credit and real estate.
| | | | Pension Assets | | VEBA Assets | Pension Assets | | VEBA Assets |
| Asset Category | 2015 Target Allocation | | Percentage of Plan Assets at December 31, | | 2015 Target Allocation | | Percentage of Plan Assets at December 31, | 2018 Target Allocation | | Percentage of Plan Assets at December 31, | | 2018 Target Allocation | | Percentage of Plan Assets at December 31, |
| 2014 | | 2013 | | 2014 | | 2013 | 2017 | | 2016 | | 2017 | | 2016 |
| Equity securities | 48.2 | % | | 48.6 | % | | 51.5 | % | | 8.0 | % | | 8.6 | % | | 10.4 | % | 45.0 | % | | 43.6 | % | | 43.2 | % | | 8.0 | % | | 8.7 | % | | 8.4 | % |
| Fixed income | 28.4 | % | | 29.0 | % | | 26.7 | % | | 80.1 | % | | 79.3 | % | | 66.6 | % | 28.0 | % | | 27.0 | % | | 26.4 | % | | 80.0 | % | | 77.7 | % | | 78.3 | % |
| Hedge funds | 6.1 | % | | 6.2 | % | | 6.3 | % | | 4.2 | % | | 4.3 | % | | 9.8 | % | 5.0 | % | | 5.0 | % | | 5.9 | % | | 4.0 | % | | 4.4 | % | | 4.4 | % |
| Private equity | 5.5 | % | | 3.3 | % | | 3.2 | % | | 2.6 | % | | 2.3 | % | | 2.4 | % | 7.0 | % | | 5.3 | % | | 5.3 | % | | 3.0 | % | | 1.5 | % | | 1.7 | % |
| Structured credit | 5.9 | % | | 6.9 | % | | 6.7 | % | | 2.1 | % | | 2.3 | % | | 5.4 | % | 7.5 | % | | 9.7 | % | | 9.3 | % | | 2.0 | % | | 3.0 | % | | 2.7 | % |
| Real estate | 5.9 | % | | 5.3 | % | | 4.5 | % | | 3.0 | % | | 3.2 | % | | 5.3 | % | 7.5 | % | | 8.7 | % | | 9.0 | % | | 3.0 | % | | 4.6 | % | | 4.4 | % |
| Cash | — | % | | 0.7 | % | | 1.1 | % | | — | % | | — | % | | 0.1 | % | — | % | | 0.7 | % | | 0.9 | % | | — | % | | 0.1 | % | | 0.1 | % |
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Pension
The fair values of our pension plan assets at December 31, 20142017 and 20132016 by asset category are as follows:
| | | | (In Millions) | (In Millions) |
| | December 31, 2014 | December 31, 2017 |
| Asset Category | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Equity securities: | | | | | | | | | | | | | | |
| U.S. large-cap | $ | 248.5 |
| | $ | — |
| | $ | — |
| | $ | 248.5 |
| $ | 130.1 |
| | $ | — |
| | $ | — |
| | $ | 130.1 |
|
| U.S. small/mid-cap | 55.8 |
| | — |
| | — |
| | 55.8 |
| 35.5 |
| | — |
| | — |
| | 35.5 |
|
| International | 157.4 |
| | — |
| | — |
| | 157.4 |
| 160.9 |
| | — |
| | — |
| | 160.9 |
|
| Fixed income | 243.7 |
| | 31.8 |
| | — |
| | 275.5 |
| 173.6 |
| | 28.8 |
| | — |
| | 202.4 |
|
| Hedge funds | — |
| | — |
| | 59.2 |
| | 59.2 |
| — |
| | — |
| | 37.4 |
| | 37.4 |
|
| Private equity | — |
| | — |
| | 31.2 |
| | 31.2 |
| — |
| | — |
| | 39.8 |
| | 39.8 |
|
| Structured credit | — |
| | — |
| | 65.4 |
| | 65.4 |
| — |
| | — |
| | 72.9 |
| | 72.9 |
|
| Real estate | — |
| | — |
| | 50.0 |
| | 50.0 |
| — |
| | — |
| | 65.5 |
| | 65.5 |
|
| Cash | 6.6 |
| | — |
| | — |
| | 6.6 |
| 5.3 |
| | — |
| | — |
| | 5.3 |
|
| Total | $ | 712.0 |
| | $ | 31.8 |
| | $ | 205.8 |
| | $ | 949.6 |
| $ | 505.4 |
| | $ | 28.8 |
| | $ | 215.6 |
| | $ | 749.8 |
|
| | | | (In Millions) | (In Millions) |
| | December 31, 2013 | December 31, 2016 |
| Asset Category | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Equity securities: | | | | | | | | | | | | | | |
| U.S. large-cap | $ | 261.5 |
| | $ | — |
| | $ | — |
| | $ | 261.5 |
| $ | 144.7 |
| | $ | — |
| | $ | — |
| | $ | 144.7 |
|
| U.S. small/mid-cap | 60.8 |
| | — |
| | — |
| | 60.8 |
| 39.9 |
| | — |
| | — |
| | 39.9 |
|
| International | 149.3 |
| | — |
| | — |
| | 149.3 |
| 111.8 |
| | — |
| | — |
| | 111.8 |
|
| Fixed income | 214.8 |
| | 30.1 |
| | — |
| | 244.9 |
| 157.5 |
| | 23.7 |
| | — |
| | 181.2 |
|
| Hedge funds | — |
| | — |
| | 57.6 |
| | 57.6 |
| — |
| | — |
| | 40.6 |
| | 40.6 |
|
| Private equity | — |
| | — |
| | 29.1 |
| | 29.1 |
| — |
| | — |
| | 36.1 |
| | 36.1 |
|
| Structured credit | — |
| | — |
| | 61.0 |
| | 61.0 |
| — |
| | — |
| | 63.8 |
| | 63.8 |
|
| Real estate | — |
| | — |
| | 40.9 |
| | 40.9 |
| — |
| | — |
| | 61.9 |
| | 61.9 |
|
| Cash | 10.2 |
| | — |
| | — |
| | 10.2 |
| 5.8 |
| | — |
| | — |
| | 5.8 |
|
| Total | $ | 696.6 |
| | $ | 30.1 |
| | $ | 188.6 |
| | $ | 915.3 |
| $ | 459.7 |
| | $ | 23.7 |
| | $ | 202.4 |
| | $ | 685.8 |
|
Following is a description of the inputs and valuation methodologies used to measure the fair value of our plan assets.
Equity Securities
Equity securities classified as Level 1 investments include U.S. large-, small- and mid-cap investments and international equity. These investments are comprised of securities listed on an exchange, market or automated quotation system for which quotations are readily available. The valuation of these securities is determined using a market approach, and is based upon unadjusted quoted prices for identical assets in active markets.
Fixed Income
Fixed income securities classified as Level 1 investments include bonds and government debt securities. These investments are comprised of securities listed on an exchange, market or automated quotation system for which quotations are readily available. The valuation of these securities is determined using a market approach, and is based upon unadjusted quoted prices for identical assets in active markets. Also included in Fixed Income is a portfolio of U.S. Treasury STRIPS, which are zero-coupon bearing fixed income securities backed by the full faith and credit of the U.S. government. The securities sell at a discount to par because there are no incremental coupon payments. STRIPS are not issued directly by the Treasury, but rather are created by a financial institution, government securities broker or government securities dealer. Liquidity on the issue varies depending on various market conditions; however, in general the STRIPS market is slightly less liquid than that of the U.S. Treasury Bond market. The STRIPS are priced daily through a bond pricing vendor and are classified as Level 2.
Hedge Funds
Hedge funds are alternative investments comprised of direct or indirect investment in offshore hedge funds of funds with an investment objective to achieve an attractive risk-adjusted returnequity-like returns with moderateone half the volatility of equities and moderate directional market exposure over a full market cycle.correlation. The valuation techniques used to measure fair value attempt to maximize the use of observable inputs and minimize the use of unobservable inputs. Considerable judgment is required to interpret the factors used to develop estimates of fair value. Valuations of the underlying investment funds are obtained and reviewed. The securities that are valued by the funds are interests in the investment funds and not the underlying holdings of such investment funds. Thus, the inputs used to value the investments in each of the underlying funds may differ from the inputs used to value the underlying holdings of such funds.
In determining the fair value of a security, the fund managers may consider any information that is deemed relevant, which may include one or more of the following factors regarding the portfolio security, if appropriate: type of security or asset; cost at the date of purchase; size of holding; last trade price; most recent valuation; fundamental analytical data relating to the investment in the security; nature and duration of any restriction on the disposition of the security; evaluation of the factors that influence the market in which the security is purchased or sold; financial statements of the issuer; discount from market value of unrestricted securities of the same class at the time of purchase; special reports prepared by analysts; information as to any transactions or offers with respect to the security; existence of merger proposals or tender offers affecting the security; price and extent of public trading in similar securities of the issuer or
compatible companies and other relevant matters; changes in interest rates; observations from financial institutions; domestic or foreign government actions or pronouncements; other recent events; existence of shelf registration for restricted securities; existence of any undertaking to register the security; and other acceptable methods of valuing portfolio securities.
Hedge fund investments in the SEI Special Situations Fund are valued quarterly and recorded on a one-month lag. For alternative investment values reported on a lag, current market information is reviewed for any material changes in values at the reporting date. Share repurchases for the SEI Special Situations Fund are considered semi-annually subject to notice of 95 days.
Private Equity Funds
Private equity funds are alternative investments that represent direct or indirect investments in partnerships, venture funds or a diversified pool of private investment vehicles (fund of funds).
Investment commitments are made in private equity funds of funds based on an asset allocation strategy, and capital calls are made over the life of the funds to fund the commitments. As of December 31, 2014,2017, remaining commitments total $55.5$52.7 million for both our pension and other benefits. Of this amount, an additional $45.0 million commitment was executed during the third quarter of 2014 in order to bring the portfolio in line with the target allocation for this asset category. Committed amounts are funded from plan assets when capital calls are made. Investment commitments are not pre-funded in reserve accounts. Refer to the valuation methodologies for equity securities above for further information.
The valuation of investments in private equity funds of funds initially is performed by the underlying fund managers. In determining the fair value, the fund managers may consider any information that is deemed relevant, which may include: type of security or asset; cost at the date of purchase; size of holding; last trade price; most recent valuation; fundamental analytical data relating to the investment in the security; nature and duration of any restriction on the disposition of the security; evaluation of the factors that influence the market in which the security is purchased or sold; financial statements of the issuer; discount from market value of unrestricted securities of the same class at the time of purchase; special reports prepared by analysts; information as to any transactions or offers with respect to the security; existence of merger proposals or tender offers affecting the security; price and extent of public trading in similar securities of the issuer or compatible companies and other relevant matters; changes in interest rates; observations from financial institutions; domestic or foreign government actions or pronouncements; other recent events; existence of shelf registration for restricted securities; existence of any undertaking to register the security; and other acceptable methods of valuing portfolio securities.
The valuations are obtained from the underlying fund managers, and the valuation methodology and process is reviewed for consistent application and adherence to policies. Considerable judgment is required to interpret the factors used to develop estimates of fair value.
Private equity investments are valued quarterly and recorded on a one-quarter lag. For alternative investment values reported on a lag, current market information is reviewed for any material changes in values at the reporting date. Capital distributions for the funds do not occur on a regular frequency. Liquidation of these investments would require sale of the partnership interest.
Structured Credit
Structured credit investments are alternative investments comprised of collateralized debt obligations and other structured credit investments that are priced based on valuations provided by independent, third-party pricing agents, if available. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value structured credit investments at an evaluated bid price by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value of such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available are valued at the last quoted sale price on the primary exchange or market on which they are traded. Debt obligations with remaining maturities of 60 days or less may be valued at amortized cost, which approximates fair value.
Structured credit investments are valued monthly and recorded on a one-month lag. For alternative investment values reported on a lag, current market information is reviewed for any material changes in values at the reporting date. RedemptionHistorically, redemption requests arehave been considered quarterly, subject to notice of 90 days, although the advisor is currently only requiring notice of 65 days.
Real Estate
The real estate portfolio for the pension plans is an alternative investment primarily comprised of threetwo funds with strategic categories of real estate investments. All real estate holdings are appraised externally at least annually, and appraisals are conducted by reputable, independent appraisal firms that are members of the Appraisal Institute. All external appraisals are performed in accordance with the Uniform Standards of Professional Appraisal Practices. The property valuations and assumptions ofabout each property are reviewed quarterly by the investment advisor and values are adjusted if there has been a significant change in circumstances relating to the property since the last external appraisal. The valuation methodology utilized in determining the fair value is consistent with the best practices prevailing within the real estate appraisal and real estate investment management industries, including the Real Estate Information Standards, and standards promulgated by the National Council of Real Estate Investment Fiduciaries, the National Association of Real Estate Investment Fiduciaries, and the National Association of Real Estate Managers. In addition, the investment advisor may cause additional appraisals to be performed. TwoOne of the funds’fund's fair values arevalue is updated monthly, and there is no lag in reported values.value. Redemption requests for these two funds are considered on a quarterly basis, subject to notice of 45 days.
Effective October 1, 2009, one of the real estate funds began an orderly wind-down. The decision to wind down the fund primarily was driven by real estate market factors that adversely affected the availability of new investor capital. Third-party appraisals of this fund’s assets were eliminated; however, internal valuation updates for all assets and liabilities of the fund are prepared quarterly. The fund’s asset values are recorded on a one-quarter lag, and current market information is reviewed for any material changes in values at the reporting date. As of December 31, 2014, the fund was largely unwound with no further material distributions expected.
During 2011, a new real estate fund of funds investment was added for the Empire, Tilden, Hibbing and United Taconite VEBA plans as a result of the asset allocation review process. This fund invests in pooled investment vehicles that in turn invest in commercial real estate properties. Valuations are performed quarterly and financial statements are prepared on a semi-annual basis, with annual audited statements. Asset values for this fund are reported with a one-quarter lag and current market information is reviewed for any material changes in values at the reporting date. In most cases, values are based on valuations reported by underlying fund managers or other independent third-party sources, but the fund has discretion to use other valuation methods, subject to compliance with ERISA. Valuations are typically estimates only and subject to upward or downward revision based on each underlying fund’s annual audit. Withdrawals are permitted on the last business day of each quarter subject to a 65-day prior written notice.
The following represents the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the years ended December 31, 20142017 and 2013:2016:
| | | | (In Millions) | (In Millions) |
| | Year Ended December 31, 2014 | Year Ended December 31, 2017 |
| | Hedge Funds | | Private Equity Funds | | Structured Credit Fund | | Real Estate | | Total | Hedge Funds | | Private Equity Funds | | Structured Credit Fund | | Real Estate | | Total |
| Beginning balance — January 1, 2014 | $ | 57.6 |
| | $ | 29.1 |
| | $ | 61.0 |
| | $ | 40.9 |
| | $ | 188.6 |
| |
| Beginning balance — January 1, 2017 | | $ | 40.6 |
| | $ | 36.1 |
| | $ | 63.8 |
| | $ | 61.9 |
| | $ | 202.4 |
|
| Actual return on plan assets: |
| |
| |
| |
| | |
| |
| |
| |
| | |
Relating to assets still held at the reporting date | 3.1 |
| | 3.2 |
| | 4.4 |
| | 5.2 |
| | 15.9 |
| 2.5 |
| | 0.3 |
| | 9.1 |
| | 4.2 |
| | 16.1 |
|
Relating to assets sold during the period | (1.5 | ) | | 3.0 |
| | — |
| | — |
| | 1.5 |
| 0.4 |
| | 4.5 |
| | — |
| | (0.1 | ) | | 4.8 |
|
| Purchases | — |
| | 1.4 |
| | — |
| | 5.4 |
| | 6.8 |
| 39.0 |
| | 4.5 |
| | — |
| | 14.4 |
| | 57.9 |
|
| Sales | — |
| | (5.5 | ) | | — |
| | (1.5 | ) | | (7.0 | ) | (45.1 | ) | | (5.6 | ) | | — |
| | (14.9 | ) | | (65.6 | ) |
| Ending balance — December 31, 2014 | $ | 59.2 |
| | $ | 31.2 |
| | $ | 65.4 |
| | $ | 50.0 |
| | $ | 205.8 |
| |
| Ending balance — December 31, 2017 | | $ | 37.4 |
| | $ | 39.8 |
| | $ | 72.9 |
| | $ | 65.5 |
| | $ | 215.6 |
|
| | | | (In Millions) | (In Millions) |
| | Year Ended December 31, 2013 | Year Ended December 31, 2016 |
| | Hedge Funds | | Private Equity Funds | | Structured Credit Fund | | Real Estate | | Total | Hedge Funds | | Private Equity Funds | | Structured Credit Fund | | Real Estate | | Total |
| Beginning balance — January 1, 2013 | $ | 85.6 |
| | $ | 29.3 |
| | $ | 56.2 |
| | $ | 29.4 |
| | $ | 200.5 |
| |
| Beginning balance — January 1, 2016 | | $ | 40.7 |
| | $ | 33.1 |
| | $ | 62.1 |
| | $ | 57.5 |
| | $ | 193.4 |
|
| Actual return on plan assets: |
| |
| |
| |
| | |
| |
| |
| |
| | |
Relating to assets still held at the reporting date | 4.5 |
| | (2.1 | ) | | 33.5 |
| | 5.1 |
| | 41.0 |
| (0.1 | ) | | (2.7 | ) | | 10.0 |
| | 5.1 |
| | 12.3 |
|
Relating to assets sold during the period | (1.2 | ) | | 5.2 |
| | (28.7 | ) | | (0.4 | ) | | (25.1 | ) | — |
| | 3.7 |
| | (0.3 | ) | | (0.1 | ) | | 3.3 |
|
| Purchases | 66.0 |
| | 14.7 |
| | 27.5 |
| | 36.8 |
| | 145.0 |
| — |
| | 8.0 |
| | — |
| | — |
| | 8.0 |
|
| Sales | (97.3 | ) | | (18.0 | ) | | (27.5 | ) | | (30.0 | ) | | (172.8 | ) | — |
| | (6.0 | ) | | (8.0 | ) | | (0.6 | ) | | (14.6 | ) |
| Ending balance — December 31, 2013 | $ | 57.6 |
| | $ | 29.1 |
| | $ | 61.0 |
| | $ | 40.9 |
| | $ | 188.6 |
| |
| Ending balance — December 31, 2016 | | $ | 40.6 |
| | $ | 36.1 |
| | $ | 63.8 |
| | $ | 61.9 |
| | $ | 202.4 |
|
VEBA
Assets for other benefits include VEBA trusts pursuant to bargaining agreements that are available to fund retired employees’ life insurance obligations and medical benefits. The fair valuesvalue of our other benefit plan assets at December 31, 20142017 and 20132016 by asset category are as follows:
| | | | (In Millions) | (In Millions) |
| | December 31, 2014 | December 31, 2017 |
| Asset Category | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Equity securities: | | | | | | | | | | | | | | |
| U.S. large-cap | $ | 11.6 |
| | $ | — |
| | $ | — |
| | $ | 11.6 |
| $ | 11.4 |
| | $ | — |
| | $ | — |
| | $ | 11.4 |
|
| U.S. small/mid-cap | 2.9 |
| | — |
| | — |
| | 2.9 |
| 2.8 |
| | — |
| | — |
| | 2.8 |
|
| International | 8.6 |
| | — |
| | — |
| | 8.6 |
| 8.8 |
| | — |
| | — |
| | 8.8 |
|
| Fixed income | 174.5 |
| | 39.1 |
| | — |
| | 213.6 |
| 164.1 |
| | 40.0 |
| | — |
| | 204.1 |
|
| Hedge funds | — |
| | — |
| | 11.5 |
| | 11.5 |
| — |
| | — |
| | 11.4 |
| | 11.4 |
|
| Private equity | — |
| | — |
| | 6.2 |
| | 6.2 |
| — |
| | — |
| | 3.9 |
| | 3.9 |
|
| Structured credit | — |
| | — |
| | 6.1 |
| | 6.1 |
| — |
| | — |
| | 7.9 |
| | 7.9 |
|
| Real estate | — |
| | — |
| | 8.7 |
| | 8.7 |
| — |
| | — |
| | 12.0 |
| | 12.0 |
|
| Cash | 0.1 |
| | — |
| | — |
| | 0.1 |
| 0.2 |
| | — |
| | — |
| | 0.2 |
|
| Total | $ | 197.7 |
| | $ | 39.1 |
| | $ | 32.5 |
| | $ | 269.3 |
| $ | 187.3 |
| | $ | 40.0 |
| | $ | 35.2 |
| | $ | 262.5 |
|
| | | | (In Millions) | (In Millions) |
| | December 31, 2013 | December 31, 2016 |
| Asset Category | Quoted Prices in Active
Markets for Identical
Assets/Liabilities
(Level 1) | | Significant Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total | Quoted Prices in Active
Markets for Identical
Assets/Liabilities
(Level 1) | | Significant Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total |
| Equity securities: |
| |
| |
| |
|
| |
| |
| |
|
| U.S. large-cap | $ | 15.7 |
| | $ | — |
| | $ | — |
| | $ | 15.7 |
| $ | 10.6 |
| | $ | — |
| | $ | — |
| | $ | 10.6 |
|
| U.S. small/mid-cap | 2.7 |
| | — |
| | — |
| | 2.7 |
| 2.7 |
| | — |
| | — |
| | 2.7 |
|
| International | 7.8 |
| | — |
| | — |
| | 7.8 |
| 8.1 |
| | — |
| | — |
| | 8.1 |
|
| Fixed income | 134.4 |
| | 33.7 |
| | — |
| | 168.1 |
| 162.0 |
| | 35.9 |
| | — |
| | 197.9 |
|
| Hedge funds | — |
| | — |
| | 24.6 |
| | 24.6 |
| — |
| | — |
| | 11.2 |
| | 11.2 |
|
| Private equity | — |
| | — |
| | 6.0 |
| | 6.0 |
| — |
| | — |
| | 4.3 |
| | 4.3 |
|
| Structured credit | — |
| | — |
| | 13.5 |
| | 13.5 |
| — |
| | — |
| | 6.9 |
| | 6.9 |
|
| Real estate | — |
| | — |
| | 13.2 |
| | 13.2 |
| — |
| | — |
| | 11.1 |
| | 11.1 |
|
| Cash | 0.2 |
| | — |
| | — |
| | 0.2 |
| 0.2 |
| | — |
| | — |
| | 0.2 |
|
| Total | $ | 160.8 |
| | $ | 33.7 |
| | $ | 57.3 |
| | $ | 251.8 |
| $ | 183.6 |
| | $ | 35.9 |
| | $ | 33.5 |
| | $ | 253.0 |
|
Refer to the pension asset discussion above for further information regarding the inputs and valuation methodologies used to measure the fair value of each respective category of plan assets.
The following represents the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the year ended December 31, 20142017 and 2013:2016:
| | | | (In Millions) | (In Millions) |
| | Year Ended December 31, 2014 | Year Ended December 31, 2017 |
| | Hedge Funds | | Private Equity Funds | | Structured Credit Fund | | Real Estate | | Total | Hedge Funds | | Private Equity Funds | | Structured Credit Fund | | Real Estate | | Total |
| Beginning balance — January 1, 2014 | $ | 24.6 |
| | $ | 6.0 |
| | $ | 13.5 |
| | $ | 13.2 |
| | $ | 57.3 |
| |
| Beginning balance — January 1, 2017 | | $ | 11.2 |
| | $ | 4.3 |
| | $ | 6.9 |
| | $ | 11.1 |
| | $ | 33.5 |
|
| Actual return on plan assets: |
| |
| |
| |
| | |
| |
| |
| |
| | |
| Relating to assets still held at the reporting date | 0.5 |
| | 1.0 |
| | 0.4 |
| | 0.9 |
| | 2.8 |
| 0.8 |
| | 0.9 |
| | 2.0 |
| | 3.4 |
| | 7.1 |
|
| Relating to assets sold during the period | 0.6 |
| | 0.4 |
| | 0.4 |
| | 0.5 |
| | 1.9 |
| — |
| | (0.4 | ) | | (1.0 | ) | | (2.5 | ) | | (3.9 | ) |
| Purchases | — |
| | 0.1 |
| | — |
| | — |
| | 0.1 |
| 17.1 |
| | 1.8 |
| | 2.1 |
| | 3.0 |
| | 24.0 |
|
| Sales | (14.2 | ) | | (1.3 | ) | | (8.2 | ) | | (5.9 | ) | | (29.6 | ) | (17.7 | ) | | (2.7 | ) | | (2.1 | ) | | (3.0 | ) | | (25.5 | ) |
| Ending balance — December 31, 2014 | $ | 11.5 |
| | $ | 6.2 |
| | $ | 6.1 |
| | $ | 8.7 |
| | $ | 32.5 |
| |
| Ending balance — December 31, 2017 | | $ | 11.4 |
| | $ | 3.9 |
| | $ | 7.9 |
| | $ | 12.0 |
| | $ | 35.2 |
|
| | | | (In Millions) | (In Millions) |
| | Year Ended December 31, 2013 | Year Ended December 31, 2016 |
| | Hedge Funds | | Private Equity Funds | | Structured Credit Fund | | Real Estate | | Total | Hedge Funds | | Private Equity Funds | | Structured Credit Fund | | Real Estate | | Total |
| Beginning balance — January 1, 2014 | $ | 23.2 |
| | $ | 6.2 |
| | $ | 12.5 |
| | $ | 15.9 |
| | $ | 57.8 |
| |
| Beginning balance — January 1, 2016 | | $ | 11.2 |
| | $ | 5.5 |
| | $ | 5.8 |
| | $ | 10.0 |
| | $ | 32.5 |
|
| Actual return on plan assets: |
| |
| |
| |
| | |
| |
| |
| |
| | |
| Relating to assets still held at the reporting date | 2.1 |
| | 0.2 |
| | 2.4 |
| | 2.8 |
| | 7.5 |
| — |
| | (0.3 | ) | | 1.1 |
| | 1.1 |
| | 1.9 |
|
| Relating to assets sold during the period | (0.7 | ) | | 0.4 |
| | (1.4 | ) | | (0.7 | ) | | (2.4 | ) | — |
| | 0.1 |
| | — |
| | — |
| | 0.1 |
|
| Purchases | 22.5 |
| | 0.3 |
| | 11.0 |
| | 14.2 |
| | 48.0 |
| — |
| | — |
| | — |
| | — |
| | — |
|
| Sales | (22.5 | ) | | (1.1 | ) | | (11 | ) | | (19.0 | ) | | (53.6 | ) | — |
| | (1.0 | ) | | — |
| | — |
| | (1.0 | ) |
| Ending balance — December 31, 2014 | $ | 24.6 |
| | $ | 6.0 |
| | $ | 13.5 |
| | $ | 13.2 |
| | $ | 57.3 |
| |
| Ending balance — December 31, 2016 | | $ | 11.2 |
| | $ | 4.3 |
| | $ | 6.9 |
| | $ | 11.1 |
| | $ | 33.5 |
|
Contributions
Annual contributions to the pension plans are made within income tax deductibility restrictions in accordance with statutory regulations. In the event of plan termination, the plan sponsors could be required to fund additional shutdown and early retirement obligations that are not included in the pension obligations. Costs for early termination for pensions and other benefits are estimated to be $22.5 million and $0.8 million, respectively. The Company currently has no intention to shutdown, terminate or withdraw from any of its employee benefit plans.
|
| | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | Pension Benefits | | Other Benefits |
| Company Contributions | | VEBA | | Direct Payments | | Total |
| 2013 | | $ | 53.7 |
| | $ | 14.6 |
| | $ | 10.9 |
| | $ | 25.5 |
|
| 2014 | | 60.5 |
| | — |
| | 7.3 |
| | 7.3 |
|
| 2015 (Expected)* | | 36.8 |
| | — |
| | 6.8 |
| | 6.8 |
|
|
| | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | Pension Benefits | | Other Benefits |
| Company Contributions | | VEBA | | Direct Payments | | Total |
| 2016 | | $ | 1.2 |
| | $ | — |
| | $ | 1.1 |
| | $ | 1.1 |
|
| 2017 | | 24.4 |
| | — |
| | 2.1 |
| | 2.1 |
|
2018 (Expected)1 | | 27.8 |
| | — |
| | 4.0 |
| | 4.0 |
|
| | | | | | | | | |
1 Pursuant to the bargaining agreement, benefits can be paid from VEBA trusts that are at least 70% funded (all VEBA trusts are over 70% funded at December 31, 2017). Funding obligations have been suspended as Hibbing's, UTAC's, Tilden's and Empire's share of the value of their respective trust assets have reached 90% of their obligation. |
| |
* | Pursuant to the bargaining agreement, benefits can be paid from VEBA trusts that are at least 70 percent funded (all VEBA trusts are over 70 percent funded at December 31, 2014). Funding obligations have been suspended as Hibbing's, UTAC's, Tilden's and Empire's share of the value of their respective trust assets have reached 90 percent of their obligation. |
VEBA plans are not subject to minimum regulatory funding requirements. Amounts contributed are pursuant to bargaining agreements.
Contributions by participants to the other benefit plans were $4.8$4.6 million for the year ended December 31, 20142017 and $5.6$6.0 million for the year ended December 31, 2013.2016.
Estimated Cost for 20152018
For 2015,2018, we estimate net periodic benefit cost as follows:
| | | | (In Millions) | (In Millions) |
| Defined benefit pension plans | $ | 23.6 |
| $ | 12.3 |
|
| Other postretirement benefits | 6.0 |
| (6.2 | ) |
| Total | $ | 29.6 |
| $ | 6.1 |
|
Estimated Future Benefit Payments
|
| | | | | | | | | | | | | | | |
| | (In Millions) |
| | Pension Benefits | | Other Benefits |
Gross Company Benefits | | Less Medicare Subsidy | | Net Company Payments |
| 2015 | $ | 89.3 |
| | $ | 23.1 |
| | $ | 0.9 |
| | $ | 22.2 |
|
| 2016 | 77.7 |
| | 23.0 |
| | 1.0 |
| | 22.0 |
|
| 2017 | 78.1 |
| | 23.2 |
| | 1.1 |
| | 22.1 |
|
| 2018 | 79.3 |
| | 23.3 |
| | 1.3 |
| | 22.0 |
|
| 2019 | 78.6 |
| | 22.9 |
| | 1.4 |
| | 21.5 |
|
| 2020-2024 | 402.4 |
| | 110.7 |
| | 8.6 |
| | 102.1 |
|
Other Potential Benefit Obligations |
| | | | | | | | | | | | | | | |
| | (In Millions) |
| | Pension Benefits | | Other Benefits |
Gross Company Benefits | | Less Medicare Subsidy | | Net Benefit Payments |
| 2018 | $ | 69.6 |
| | $ | 18.9 |
| | $ | (0.7 | ) | | $ | 18.2 |
|
| 2019 | 66.7 |
| | 18.0 |
| | (0.8 | ) | | 17.2 |
|
| 2020 | 66.0 |
| | 17.4 |
| | (0.9 | ) | | 16.5 |
|
| 2021 | 65.1 |
| | 16.9 |
| | (1.0 | ) | | 15.9 |
|
| 2022 | 65.2 |
| | 16.7 |
| | (1.1 | ) | | 15.6 |
|
| 2023-2027 | 310.5 |
| | 81.5 |
| | (6.6 | ) | | 74.9 |
|
While the foregoing reflects our obligation, our total exposure in the event of non-performance is potentially greater. Following is a summary comparison of the total obligation:
|
| | | | | | | |
| | (In Millions) |
| | December 31, 2014 |
| | Defined Benefit Pensions | | Other Benefits |
| Fair value of plan assets | $ | 949.6 |
| | $ | 269.3 |
|
| Benefit obligation | (1,227.4 | ) | | (395.9 | ) |
| Underfunded status of plan | $ | (277.8 | ) | | $ | (126.6 | ) |
| Additional shutdown and early retirement benefits | $ | (26.7 | ) | | $ | 40.5 |
|
NOTE 8 - STOCK COMPENSATION PLANS
At December 31, 2014,2017, we have outstanding awards under two share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans was $23.7$18.7 million, $21.1$14.2 million and $20.6$13.9 million in 2014, 20132017, 2016 and 2012,2015, respectively, which primarily was recorded in Selling, general and administrative expenses in the Statements of Consolidated Operations. The totalThere was no income tax benefit recognized infor the Statements of Consolidated Operations for share-based compensation arrangements was $8.3 million, $7.4 millionyears ended December 31, 2017, 2016 and $7.2 million for 2014, 2013 and 2012, respectively.2015, due to the full valuation allowance.
Employees’ Plans
The 2012Amended 2015 Equity Plan was approved by our Board of Directors on February 21, 2017 and by our shareholders on April 25, 2017. The Amended 2015 Equity Plan increased the maximum number of shares that may be issued by 15.0 million common shares. The 2015 Equity Plan was approved by our Board of Directors on March 13, 201226, 2015 and by our shareholders approved it on May 8, 2012, effective as of March 13, 2012.19, 2015. The 20122015 Equity Plan replaced the ICE Plan. The maximum number of shares that may be issued under the 2012 Equity Plan is 6.0 million common shares. On February 10, 2014, upon recommendation by the Compensation and Organization Committee, Cliffs’ Board of Directors approved and adopted, subject to the approval of Cliffs' shareholders at the 2014 Annual Meeting, the 2012 Amended Equity Plan. The principal reason for amending and restating the 2012 Equity Plan was to increase the number of common shares available for issuance by 5.0 million common shares. This amended plan was approved by Cliffs' shareholders at the 2014 Annual Meeting held on July 29, 2014.
The Compensation and Organization Committee of the Board of Directors approved grants under the 2012 Equity Plan, and allowed for a maximum of 12.9 million common shares to be issued. No additional grants were issued from the 2012 Equity Plan after the date of approval of the 2015 Equity Plan; however, all awards previously granted under the 2012 Amended Equity Plan to certain officerswill continue in full force and employees for the 2014 to 2016 performance period. Shares granted under the awards during 2014 consisted of 0.8 million performance shares based on TSR, 0.5 million restricted share units, 0.3 million stock options and 0.4 million performance-based restricted stock units, each of which may, or may not, convert into shares based on our shares achieving and maintaining certain milestones above an absolute threshold during the performance period.
At our July 29, 2014 Annual Meeting, the shareholders voted on the election of eleven directors. Thirteen persons were nominated for election to the eleven board positions. On August 6, 2014, the Company received the final report of the inspector of election that confirmed the election of six new directors to our Board of Directors. Such an event constituted a changeeffect in control pursuant to our incentive equity plans. As a result of such change in the majority of our directors and pursuant toaccordance with the terms of the various plans and applicable award agreements, alloutstanding awards.
Following is a summary of the outstanding and unvested equity incentives awarded to participants prior to October 2013 became vested. Accordingly, this resulted in recognizing $11.7 million of additional equity-based compensation expense in the accompanying financial statements, representing the remaining unrecognized compensation expense of the awards. For any equityapproved grants awarded after September 2013, the vesting of all such grants will accelerate and pay out in cash only following a participant's qualifying termination of employment associated with the change in control and if the common shares are not substituted with a replacement award. This potential liability for additional double-trigger payments for share-based compensation in cash will expire entirely in two years.
For the outstanding 2012 Equity Plan and 2012 Amended Equity Plan awards that were issued subsequent to October 2013, each performance share, if earned, entitles the holder to receive common shares or cash within a range between a threshold and maximum number of our common shares, with the actual number of common shares earned dependent upon whether the Company achieves certain objectives and performance goals as established by the Compensation and Organization Committee. Committee:
|
| | | | | | | | | | | | | |
| Grant Year | | Vesting Date | | Plan | | Restricted Stock Granted | | Performance Shares Granted | | Stock Options Granted |
| 2017 | | 12/31/2019 | | Amended 2015 Equity Plan | | 532,358 |
| | 249,106 |
| | — |
|
| 2017 | | 12/31/2019 | | 2015 Equity Plan | | 553,725 |
| | 553,725 |
| | — |
|
| 2016 | | 12/31/2018 | | 2015 Equity Plan | | 3,406,716 |
| | — |
| | — |
|
| 2015 | | 12/15/2017 | | 2015 Equity Plan | | 1,473,184 |
| | — |
| | — |
|
| 2015 | | 12/31/2017 | | 2012 Equity Plan | | 874,575 |
| | 874,575 |
| | 412,710 |
|
Performance Shares
The outstanding performance share or unit grants vest over a period of three years and are intended to be paid out in common shares or cash in certain circumstances. Performance for the 2014 to 2016 performance periods is measured only on the basis of relative TSR for the period and measured against the constituents of the S&P Metals and Mining ETF Index onat the last daybeginning of trading of the relevant performance period. The final payouts for the 2014 to 2016outstanding performance period grants will vary from zero0% to 200 percent200% of the original grant. grant depending on whether and to what extent the Company achieves certain objectives and performance goals as established by the Compensation Committee.
Following is a summary of our performance share award agreements currently outstanding: |
| | | | | | | | | | | | | |
Performance
Share
Plan Year | | Performance Shares Granted | | Forfeitures to Date | | Expected to Vest | | Grant Date | | Performance Period |
| 2017 | | 249,106 |
| | — |
| | 249,106 |
| | June 26, 2017 | | 5/31/2017 - 12/31/2019 |
| 2017 | | 553,725 |
| | 5,192 |
| | 548,533 |
| | February 21, 2017 | | 1/1/2017 - 12/31/2019 |
20151 | | 410,105 |
| | 155,235 |
| | 254,870 |
| | February 9, 2015 | | 1/1/2015 - 12/31/2017 |
20151 | | 464,470 |
| | 68,667 |
| | 395,803 |
| | January 12, 2015 | | 1/1/2015 - 12/31/2017 |
| | | | | | | | | | | |
1 The performance shares granted in 2015 will have a payout of 75.3% of the original grant based on the final performance evaluation versus the performance goals that were established in the grants. |
Performance-Based Restricted Stock Units
For the outstanding 400,000 performance-based restricted stock units that were granted on November 17, 2014, the award may be earned and settled based upon certain VWAP performance for the Company’s common shares, (Threshold VWAP, Target VWAP, or Maximum VWAP) for any period of ninety (90) consecutive calendar days during a performance period commencing August 7, 2014 and ending December 31, 2017 (the “Performance Period”).2017. The performance-based restricted stock options vestunits will not have a payout based on the final performance evaluation versus the performance goals that were established in equal thirds on eachthe grants.
Restricted Stock Units
All of December 31, 2015, December 31, 2016 and December 31, 2017 subject to continued employment through each vesting date, and are exercisable cumulatively at a strike price of $13.83 after each vesting date and expire on November 17, 2021. Thethe outstanding restricted sharestock units are subject to continued employment, are retention based, will vest at the end of the respective performance period, and are payable in common shares or cash in certain circumstances at a time determined by the Compensation Committee at its discretion. The outstanding restricted stock units that were granted in 2016, cliff vest in three years on December 31, 2018 and the outstanding restricted stock units that were granted in 2017, cliff vest in three years on December 31, 2019.
Stock Options
The 412,710 stock options that were granted during the first quarter of 2015 vested on December 31, 2017, are exercisable at a strike price of $7.70 after the vesting date and expire on January 12, 2025. The 187,160 stock options that were granted in the fourth quarter of 2014 vested in equal thirds on each of December 31, 2015, 2016 and 2017 and are exercisable at a strike price of $13.83 and expire on November 17, 2021. As of December 31, 2017, 599,870 shares are exercisable with a weighted average price of $10.25.
Following is a summaryEmployee Stock Purchase Plan
On March 26, 2015, upon recommendation by the Compensation Committee, our Board of Directors approved and adopted, subject to the approval of Cliffs' shareholders at the 2015 Annual Meeting, the Cliffs Natural Resources Inc. 2015 Employee Stock Purchase Plan. This plan was approved by our performance share award agreements currently outstandingshareholders at the 2015 Annual Meeting held May 19, 2015. 10 million common shares have been reserved for issuance under this plan; however, as of December 31, 2017, this program has not been made active and no common shares have been purchased. We sought shareholder approval of this plan for the purpose of qualifying the reserved common shares for special tax treatment under Section 423 of the Internal Revenue Code of 1986, as amended.:
|
| | | | | | | | | | | | |
Performance
Share
Plan Year | Performance Shares Granted | | Estimated Forfeitures | | Expected to Vest | | Grant Date | | Performance Period |
| 2014 | 400,000 |
| | 40,911 |
| | 359,089 |
| | November 17, 2014 | | 8/7/2014 - 12/31/2017 |
| 2014 | 283,530 |
| | 24,380 |
| | 259,150 |
| | July 29, 2014 | | 1/1/2014 - 12/31/2016 |
| 2014 | 124,630 |
| | 21,098 |
| | 103,532 |
| | May 12, 2014 | | 1/1/2014 - 12/31/2016 |
| 2014 | 385,585 |
| | 120,299 |
| | 265,286 |
| | February 10, 2014 | | 1/1/2014 - 12/31/2016 |
Nonemployee Directors
At our 2014 annual meeting,Equity Grants
Our nonemployee directors are entitled to receive restricted share awards under the shareholders approved the Directors' Plan which became effective December 1, 2014. The Directors’ Plan authorizes us to issue up to 300,000 common shares from time to time toPlan. For 2017, 2016 and 2015, nonemployee Directors. Under the Share Ownership Guidelines in effect for 2014 ("Guidelines"),directors were granted a Director is required by the endspecified number of five years from date of election to hold common shares with a market value of at least $250,000. The Directors’ Plan offers the nonemployee Director the opportunity to defer all or a portion of the awards granted.
The 2008 Directors’ Plan in effect for most of 2014 provided for an Annual Equity Grant ("Equity Grant") to be awarded at our annual meeting each year to all nonemployee Directors elected or re-elected by the shareholders and a pro-rata amount was awarded to new directors upon their appointment. The value of the Equity Grant was payable in restricted shares, with a three-year vesting period fromvalue equal to $100,000, $85,000 and $85,000, respectively. The amount of shares is based on the date of grant. The closing market price of our common shares on October 16, 2014 was divided into the number of common shares remaining available for issuance under the 2008 Directors' Plan to determine the number of restricted shares awarded as the Equity Grant. In 2014, nonemployee Directors each received Equity Grants valued at $85,000 which was bifurcated into two tranches since the 2008 Director's Plan did not have a sufficient number of shares available for issuance. The first tranchedate of the 2014 Equity Grant was granted underAnnual Meeting. The awards are subject to any deferral election and pursuant to the 2008 Directors'terms of the Directors’ Plan on October 16, 2014 and valued at $42,500. The second tranche was granted under the Directors' Plan on December 2, 2014 and valued at $42,500.an award agreement.
For the last three years, Equity Grant shares have been awarded to elected or re-elected nonemployee Directors as follows:
|
| | | | | | | | | |
| Year of Grant | | Unrestricted Equity Grant Shares | | Restricted Equity Grant Shares | | Deferred Equity Grant Shares |
| 2012 | | 1,498 |
| | 8,988 |
| | 2,996 |
|
| 2013 | | 3,985 |
| | 31,506 |
| | 7,970 |
|
| 2014 | | — |
| | 73,635 |
| | — |
|
|
| | | | | | |
| Year of Grant | | Restricted Equity Grant Shares | | Deferred Equity Grant Shares |
| 2015 | | 109,408 |
| | 25,248 |
|
| 2016 | | 135,038 |
| | 29,583 |
|
| 2017 | | 93,359 |
| | 17,289 |
|
Other Information
The following table summarizes the share-based compensation expense that we recorded for continuing operations in 2014, 20132017, 2016 and 2012:2015:
| | | | (In Millions, except per share amounts) | (In Millions, except per share amounts) |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Cost of goods sold and operating expenses | $ | 7.8 |
| | $ | 6.3 |
| | $ | 4.0 |
| $ | 2.3 |
| | $ | 2.1 |
| | $ | 4.0 |
|
| Selling, general and administrative expenses | 15.9 |
| | 14.8 |
| | 16.6 |
| 16.4 |
| | 12.1 |
| | 9.9 |
|
Reduction of operating income from continuing operations before income taxes and equity income (loss) from ventures | 23.7 |
| | 21.1 |
| | 20.6 |
| |
| Income tax benefit | (8.3 | ) | | (7.4 | ) | | (7.2 | ) | |
Reduction of operating income from continuing operations before income taxes and equity loss from ventures | | 18.7 |
| | 14.2 |
| | 13.9 |
|
Income tax benefit1 | | — |
| | — |
| | — |
|
| Reduction of net income attributable to Cliffs shareholders | $ | 15.4 |
| | $ | 13.7 |
| | $ | 13.4 |
| $ | 18.7 |
| | $ | 14.2 |
| | $ | 13.9 |
|
| Reduction of earnings per share attributable to Cliffs shareholders: |
| |
| |
| | | | | |
| Basic | $ | 0.10 |
| | $ | 0.09 |
| | $ | 0.09 |
| $ | 0.06 |
| | $ | 0.07 |
| | $ | 0.09 |
|
| Diluted | $ | 0.10 |
| | $ | 0.08 |
| | $ | 0.09 |
| $ | 0.06 |
| | $ | 0.07 |
| | $ | 0.09 |
|
| | | | | | | |
1 No income tax benefit due to the full valuation allowance. | | 1 No income tax benefit due to the full valuation allowance. |
Determination of Fair Value
Performance Shares
The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historichistorical and projected stock prices was developed for both the Company and our predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved.
The expected term of the grant represents the time from the grant date to the end of the service period for each of the three plan-year agreements. We estimate the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance period.
The following assumptionsPerformance shares were utilized to estimategranted in February and June 2017. A fair value analysis was required for each of these grants and the fair value forwas determined to be $19.69 and $10.74, respectively.
Stock Options
The fair value of each stock option grant is estimated on the 2014 performance share grants:date of grant using a Black-Scholes valuation model. The expected term of the option grant is determined using the simplified method. We estimate the volatility of our common shares using historical stock prices with consistent frequency over the most recent historical period equal to the option’s expected term. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the expected term.
No stock options were granted in 2017, therefore no fair value analysis was required. |
| | | | | | | | | | | | | | | | | | |
| Grant Date | | Grant Date Market Price | | Average Expected Term (Years) | | Expected Volatility | | Risk-Free Interest Rate | | Dividend Yield | | Fair Value | | Fair Value (Percent of Grant Date Market Price) |
| February 10, 2014 | | $ | 20.58 |
| | 2.89 | | 54.0% | | 0.54% | | 2.92% | | $ | 22.21 |
| | 107.92% |
| May 12, 2014 | | $ | 17.54 |
| | 2.61 | | 54.0% | | 0.54% | | 2.92% | | $ | 18.93 |
| | 107.92% |
| July 29, 2014 | | $ | 17.62 |
| | 2.42 | | 51.3% | | 0.83% | | 3.40% | | $ | 19.02 |
| | 107.92% |
| November 17, 2014 | | $ | 10.85 |
| | 3.12 | | 52.9% | | 1.18% | | 4.30% | | $ | 10.61 |
| | 97.79% |
The fair value of the restricted sharestock units is determined based on the closing price of our common shares on the grant date. The restricted share units granted under either the 2012 Equity Plan or the 2012 Amended Equity Plan generally vest over a period of three years.
Restricted share units,Stock option, restricted stock awards deferred stock allocation and performance share activity under our long-term equity plans and Directors’ Plans are as follows:
| | | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | Shares | | Shares | | Shares | Shares | | Shares | | Shares |
| Stock options: | | | | | | | | | | |
| Outstanding at beginning of year | — |
| | — |
| | — |
| 599,870 |
| | 607,489 |
| | 250,000 |
|
| Granted during the year | 250,000 |
| | — |
| | — |
| — |
| | — |
| | 412,710 |
|
| Vested | — |
| | — |
| | — |
| |
| Forfeited/canceled | — |
| | — |
| | — |
| — |
| | (7,619 | ) | | (55,221 | ) |
| Outstanding at end of year | 250,000 |
| | — |
| | — |
| 599,870 |
| | 599,870 |
| | 607,489 |
|
| Restricted awards: | | | | | | | | | | |
| Outstanding and restricted at beginning of year | 586,084 |
| | 393,787 |
| | 425,166 |
| 5,461,783 |
| | 2,338,070 |
| | 523,176 |
|
| Granted during the year | 531,030 |
| | 396,844 |
| | 151,869 |
| 1,196,731 |
| | 3,571,337 |
| | 2,482,415 |
|
| Vested | (423,822 | ) | | (118,973 | ) | | (161,741 | ) | (1,813,315 | ) | | (271,988 | ) | | (477,157 | ) |
| Forfeited/canceled | (170,116 | ) | | (85,574 | ) | | (21,507 | ) | (68,716 | ) | | (175,636 | ) | | (190,364 | ) |
| Outstanding and restricted at end of year | 523,176 |
| | 586,084 |
| | 393,787 |
| 4,776,483 |
| | 5,461,783 |
| | 2,338,070 |
|
| Performance shares: |
| |
| |
|
| |
| |
|
| Outstanding at beginning of year | 1,040,453 |
| | 772,484 |
| | 877,435 |
| 1,368,469 |
| | 1,496,489 |
| | 1,072,376 |
|
Granted during the year 1 | 1,233,685 |
| | 806,271 |
| | 501,346 |
| |
Issued 2 | (796,624 | ) | | (289,054 | ) | | (574,518 | ) | |
| Granted during the year | | 802,831 |
| | — |
| | 874,575 |
|
Issued1 | | — |
| | (59,260 | ) | | (242,920 | ) |
| Forfeited/canceled | (405,138 | ) | | (249,248 | ) | | (31,779 | ) | (322,988 | ) | | (68,760 | ) | | (207,542 | ) |
| Outstanding at end of year | 1,072,376 |
| | 1,040,453 |
| | 772,484 |
| 1,848,312 |
| | 1,368,469 |
| | 1,496,489 |
|
Vested or expected to vest as of December 31, 2014 | 1,723,728 |
| | | | | |
Vested or expected to vest as of December 31, 20172 | | 7,224,665 |
| | | | |
| Directors’ retainer and voluntary shares: |
| |
| |
|
| |
| |
|
| Outstanding at beginning of year | 7,329 |
| | 2,880 |
| | 2,611 |
| — |
| | — |
| | — |
|
| Granted during the year | 2,281 |
| | 8,136 |
| | 1,823 |
| 25,476 |
| | — |
| | — |
|
| Forfeited/canceled | — |
| | (1,521 | ) | | — |
| |
| Vested | (9,610 | ) | | (2,166 | ) | | (1,554 | ) | (25,476 | ) | | — |
| | — |
|
| Outstanding at end of year | — |
| | 7,329 |
| | 2,880 |
| — |
| | — |
| | — |
|
Reserved for future grants or awards at end of year: | | | | | | | | | | |
| Employee plans | 6,222,434 |
| | | | | 16,606,386 |
| | | | |
| Directors’ plans | 225,955 |
| | | | | 612,266 |
| | | | |
| Total | 6,448,389 |
| | | | | 17,218,652 |
| | | | |
| | | | | | | |
1 For the year ended December 31, 2015, the shares vesting due to the change in control were paid out in cash, at target, and valued as of the respective participants' termination dates. | | 1 For the year ended December 31, 2015, the shares vesting due to the change in control were paid out in cash, at target, and valued as of the respective participants' termination dates. |
2 With the adoption of ASU 2016-09, we assume all shares are expected to vest and none will forfeit. | | 2 With the adoption of ASU 2016-09, we assume all shares are expected to vest and none will forfeit. |
| |
1
| The shares granted in 2013 and 2012 include 54,051 shares and 191,506 shares, respectively, related to the 23% and 50% payouts associated with the prior-year pool as actual payout exceeded target. |
| |
2
| For the year ended December 31, 2014, the shares vesting on December 31, 2013 were valued as of February 10, 2014, and the shares vesting due to the change in a majority of our Board of Directors that triggered the acceleration of vesting and payout of outstanding equity grants under our equity plans on August 6, 2014, were valued as of that date. |
| |
| For the years ended December 31, 2013 and December 31, 2012, the shares vested on December 31, 2012 and December 31, 2011, respectively, and were valued on February 21, 2013 and February 13, 2012, respectively. |
A summary of our outstanding share-based awards as of December 31, 20142017 is shown below:
| | | | Shares | | Weighted Average Grant Date Fair Value | Shares | | Weighted Average Grant Date Fair Value |
| Outstanding, beginning of year | 1,633,866 |
| |
| $40.20 |
| 7,430,122 |
| | $ | 5.55 |
|
| Granted | 2,016,996 |
| |
| $16.67 |
| 1,999,562 |
| | $ | 12.19 |
|
| Vested | (1,230,056 | ) | |
| $38.48 |
| (1,813,315 | ) | | $ | 5.52 |
|
| Forfeited/expired | (575,254 | ) | |
| $24.76 |
| (391,704 | ) | | $ | 12.84 |
|
| Outstanding, end of year | 1,845,552 |
| |
| $16.55 |
| 7,224,665 |
| | $ | 6.79 |
|
The total compensation cost related to outstanding awards not yet recognized is $18.3$20.1 million at December 31, 2014.2017. The weighted average remaining period for the awards outstanding at December 31, 20142017 is approximately 2.51.5 years.
NOTE 9 - INCOME TAXES
Income (Loss) from Continuing Operations Before Income Taxescontinuing operations before income taxes and Equity Income (Loss)equity loss from Venturesventures includes the following components:
| | | | | (In Millions) | | (In Millions) |
| | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| United States | | $ | (1,884.2 | ) | | $ | 837.7 |
| | $ | 838.6 |
| | $ | 90.7 |
| | $ | 124.9 |
| | $ | 314.2 |
|
| Foreign | | (7,719.5 | ) | | (348.4 | ) | | (1,340.4 | ) | | 38.7 |
| | 82.1 |
| | (1.1 | ) |
| | | $ | (9,603.7 | ) | | $ | 489.3 |
| | $ | (501.8 | ) | | $ | 129.4 |
| | $ | 207.0 |
| | $ | 313.1 |
|
The components of the provision (benefit) for income taxes on continuing operations consist of the following:
| | | | | (In Millions) | | (In Millions) |
| | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Current provision (benefit): | | | | | | | | | | | | |
| United States federal | | $ | (159.9 | ) | | $ | 101.3 |
| | $ | 71.1 |
| | $ | (252.6 | ) | | $ | (11.1 | ) | | $ | 8.2 |
|
| United States state & local | | (0.6 | ) | | 4.0 |
| | 7.6 |
| | (0.1 | ) | | (0.5 | ) | | 0.3 |
|
| Foreign | | 17.2 |
| | 87.9 |
| | 50.2 |
| | 0.3 |
| | (0.1 | ) | | 0.9 |
|
| | | (143.3 | ) | | 193.2 |
| | 128.9 |
| | (252.4 | ) | | (11.7 | ) | | 9.4 |
|
| Deferred provision (benefit): | | | | | | | | | | | | |
| United States federal | | (258.9 | ) | | 23.3 |
| | 221.2 |
| | — |
| | (0.5 | ) | | 165.8 |
|
| United States state & local | | (43.0 | ) | | 3.0 |
| | 1.4 |
| |
| Foreign | | (856.8 | ) | | (164.4 | ) | | (95.6 | ) | | — |
| | — |
| | (5.9 | ) |
| | | (1,158.7 | ) | | (138.1 | ) | | 127.0 |
| | — |
| | (0.5 | ) | | 159.9 |
|
Total provision on income (loss) from continuing operations | | $ | (1,302.0 | ) | | $ | 55.1 |
| | $ | 255.9 |
| |
| Total provision (benefit) on income from continuing operations | | | $ | (252.4 | ) | | $ | (12.2 | ) | | $ | 169.3 |
|
Reconciliation of our income tax attributable to continuing operations computed at the U.S. federal statutory rate is as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | 2014 | | 2013 | | 2012 |
| Tax at U.S. statutory rate of 35 percent | | $ | (3,361.3 | ) | | 35.0 | % | | $ | 171.3 |
| | 35.0 | % | | $ | (175.6 | ) | | 35.0 | % |
| Increase (decrease) due to: | | | | | | | | | | | | |
| Foreign exchange remeasurement | | (4.1 | ) | | — |
| | (2.6 | ) | | (0.5 | ) | | 62.3 |
| | (12.4 | ) |
| Non-taxable income related to noncontrolling interests | | 290.1 |
| | (3.0 | ) | | (1.5 | ) | | (0.3 | ) | | 61.0 |
| | (12.0 | ) |
| Impact of tax law change | | 13.0 |
| | (0.1 | ) | | — |
| | — |
| | (357.1 | ) | | 71.2 |
|
| Percentage depletion in excess of cost depletion | | (87.9 | ) | | 0.9 |
| | (97.6 | ) | | (19.9 | ) | | (109.1 | ) | | 21.7 |
|
| Impact of foreign operations | | 592.0 |
| | (6.2 | ) | | (10.2 | ) | | (2.1 | ) | | 65.2 |
| | (13.0 | ) |
| Income not subject to tax | | (46.5 | ) | | 0.5 |
| | (106.6 | ) | | (21.8 | ) | | (108.0 | ) | | 21.5 |
|
| Goodwill impairment | | 22.7 |
| | (0.2 | ) | | 20.5 |
| | 4.2 |
| | 202.2 |
| | (40.3 | ) |
| State taxes, net | | (43.6 | ) | | 0.5 |
| | 5.6 |
| | 1.1 |
| | 7.3 |
| | (1.5 | ) |
| Settlement of financial guaranty | | (343.3 | ) | | 3.6 |
| | — |
| | — |
| | — |
| | — |
|
| Manufacturer’s deduction | | — |
| | — |
| | (7.9 | ) | | (1.6 | ) | | (4.7 | ) | | 0.9 |
|
| Valuation allowance | | 1,660.6 |
| | (17.3 | ) | | 73.0 |
| | 14.9 |
| | 634.5 |
| | (126.5 | ) |
| Tax uncertainties | | 0.2 |
| | — |
| | 19.6 |
| | 5.3 |
| | (14.8 | ) | | 2.9 |
|
| Prior year adjustment in current year | | (10.4 | ) | | 0.1 |
| | (11.4 | ) | | (3.6 | ) | | (5.7 | ) | | 1.1 |
|
| Other items — net | | 16.5 |
| | (0.2 | ) | | 2.9 |
| | 0.6 |
| | (1.6 | ) | | 0.4 |
|
| Income tax (benefit) expense | | $ | (1,302.0 | ) | | 13.6 | % | | $ | 55.1 |
| | 11.3 | % | | $ | 255.9 |
| | (51.0 | )% |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | 2017 | | 2016 | | 2015 |
| Tax at U.S. statutory rate of 35% | | $ | 45.3 |
| | 35.0 | % | | $ | 72.5 |
| | 35.0 | % | | $ | 109.6 |
| | 35.0 | % |
| Increase (decrease) due to: | | | | | | | | | | | | |
| Impact of tax law change - remeasurement of deferred taxes | | 407.5 |
| | 314.8 |
| | 149.1 |
| | 72.0 |
| | — |
| | — |
|
| Prior year adjustments in current year | | (1.1 | ) | | (0.8 | ) | | (11.8 | ) | | (5.7 | ) | | 5.9 |
| | 1.9 |
|
| Valuation allowance build (reversal) | | | | | | | | | | | | |
| Tax law change - remeasurement of deferred taxes | | (407.5 | ) | | (314.8 | ) | | (149.1 | ) | | (72.0 | ) | | — |
| | — |
|
| Current year activity | | (471.7 | ) | | (364.4 | ) | | 93.9 |
| | 45.4 |
| | (104.6 | ) | | (33.4 | ) |
| Repeal of AMT | | (235.3 | ) | | (181.7 | ) | | — |
| | — |
| | — |
| | — |
|
| Prior year adjustments in current year | | (3.0 | ) | | (2.4 | ) | | 6.5 |
| | 3.1 |
| | 165.8 |
| | 52.9 |
|
| Tax uncertainties | | (1.4 | ) | | (1.1 | ) | | (11.3 | ) | | (5.5 | ) | | 84.1 |
| | 26.9 |
|
| Worthless stock deduction | | — |
| | — |
| | (73.4 | ) | | (35.5 | ) | | — |
| | — |
|
| Impact of foreign operations | | 475.4 |
| | 367.2 |
| | (42.7 | ) | | (20.6 | ) | | (53.9 | ) | | (17.2 | ) |
| Percentage depletion in excess of cost depletion | | (61.6 | ) | | (47.6 | ) | | (36.1 | ) | | (17.4 | ) | | (34.9 | ) | | (11.1 | ) |
| Non-taxable loss (income) related to noncontrolling interests | | 1.3 |
| | 1.0 |
| | (8.8 | ) | | (4.2 | ) | | (3.0 | ) | | (1.0 | ) |
| State taxes, net | | (0.1 | ) | | — |
| | 0.4 |
| | 0.2 |
| | 0.2 |
| | 0.1 |
|
| Other items, net | | (0.2 | ) | | (0.2 | ) | | (1.4 | ) | | (0.7 | ) | | 0.1 |
| | — |
|
| Provision for income tax (benefit) expense and effective income tax rate including discrete items | | $ | (252.4 | ) | | (195.0 | )% | | $ | (12.2 | ) | | (5.9 | )% | | $ | 169.3 |
| | 54.1 | % |
The components of income taxes for other than continuing operations consisted of the following:
| | | | | (In Millions) | | (In Millions) |
| | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Other comprehensive (income) loss: | | | | | | | | | | | | |
| Pension/OPEB liability | | $ | 39.8 |
| | $ | 100.0 |
| | $ | 13.8 |
| |
| Postretirement benefit liability | | | $ | — |
| | $ | — |
| | $ | 5.9 |
|
| Mark-to-market adjustments | | 3.6 |
| | 2.0 |
| | 1.7 |
| | — |
| | — |
| | 0.3 |
|
| Other | | (1.1 | ) | | (12.4 | ) | | 2.6 |
| | — |
| | 0.5 |
| | — |
|
| Total | | $ | 42.3 |
| | $ | 89.6 |
| | $ | 18.1 |
| | $ | — |
| | $ | 0.5 |
| | $ | 6.2 |
|
| | | | | | | | | | | | | |
| Paid in capital — acquisition of noncontrolling interest | | $ | — |
| | $ | 102.1 |
| | $ | — |
| |
| Paid in capital — stock based compensation | | $ | (4.8 | ) | | $ | 3.5 |
| | $ | (12.8 | ) | |
| Discontinued Operations | | $ | — |
| | $ | (2.0 | ) | | $ | 10.4 |
| | $ | — |
| | $ | — |
| | $ | (6.0 | ) |
Significant components of our deferred tax assets and liabilities as of December 31, 20142017 and 20132016 are as follows:
|
| | | | | | | | |
| | | (In Millions) |
| | | 2014 | | 2013 |
| Deferred tax assets: | | | | |
| Pensions | | $ | 108.3 |
| | $ | 88.4 |
|
| MRRT starting base allowance | | — |
| | 300.3 |
|
| Postretirement benefits other than pensions | | 63.0 |
| | 58.0 |
|
| Alternative minimum tax credit carryforwards | | 267.7 |
| | 299.2 |
|
| Investments in ventures | | 6.0 |
| | — |
|
| Asset retirement obligations | | 48.9 |
| | 61.7 |
|
| Operating loss carryforwards | | 1,083.5 |
| | 524.4 |
|
| Product inventories | | 32.3 |
| | 16.4 |
|
| Property, plant and equipment and mineral rights | | 901.6 |
| | 56.0 |
|
| State and local | | 41.9 |
| | — |
|
| Lease liabilities | | 14.1 |
| | 31.9 |
|
| Other liabilities | | 153.6 |
| | 138.3 |
|
| Total deferred tax assets before valuation allowance | | 2,720.9 |
| | 1,574.6 |
|
| Deferred tax asset valuation allowance | | (2,224.5 | ) | | (864.1 | ) |
| Net deferred tax assets | | 496.4 |
| | 710.5 |
|
| Deferred tax liabilities: | |
| |
|
| Property, plant and equipment and mineral rights | | (20.0 | ) | | (1,400.8 | ) |
| Investment in ventures | | (198.0 | ) | | (196.4 | ) |
| Intangible assets | | (7.3 | ) | | (33.5 | ) |
| Income tax uncertainties | | (49.5 | ) | | (48.5 | ) |
| Product inventories | | (16.6 | ) | | (12.8 | ) |
| Other assets | | (80.2 | ) | | (93.0 | ) |
| Total deferred tax liabilities | | (371.6 | ) | | (1,785.0 | ) |
| Net deferred tax assets (liabilities) | | $ | 124.8 |
| | $ | (1,074.5 | ) |
The deferred tax amounts are classified in the Statements of Consolidated Financial Position as current or long-term consistently with the underlying asset or liability that generates the basis difference between financial reporting and tax. Following is a summary:
|
| | | | | | | | |
| | | (In Millions) |
| | | 2014 | | 2013 |
| Deferred tax assets: | | | | |
| United States | | $ | 165.9 |
| | $ | 7.2 |
|
| Foreign | | | | |
| Current | | 2.2 |
| | 29.4 |
|
| Long-term | | 12.0 |
| | 41.5 |
|
| Total deferred tax assets | | 180.1 |
| | 78.1 |
|
| Deferred tax liabilities: | | | | |
| United States | | — |
| | 175.3 |
|
| Foreign | | | | |
| Current | | 4.0 |
| | 6.1 |
|
| Long-term | | 51.3 |
| | 971.2 |
|
| Total deferred tax liabilities | | 55.3 |
| | 1,152.6 |
|
| Net deferred tax assets (liabilities) | | $ | 124.8 |
| | $ | (1,074.5 | ) |
|
| | | | | | | | |
| | | (In Millions) |
| | | 2017 | | 2016 |
| Deferred tax assets: | | | | |
| Pensions | | $ | 76.3 |
| | $ | 114.6 |
|
| Postretirement benefits other than pensions | | 25.6 |
| | 35.2 |
|
| Alternative minimum tax credit carryforwards | | — |
| | 251.2 |
|
| Deferred income | | 24.2 |
| | 44.5 |
|
| Intangible assets | | 12.2 |
| | — |
|
| Financial instruments | | — |
| | 71.3 |
|
| Asset retirement obligations | | 9.9 |
| | 22.3 |
|
| Operating loss carryforwards | | 2,368.1 |
| | 2,699.7 |
|
| Property, plant and equipment and mineral rights | | 188.2 |
| | 181.2 |
|
| State and local | | 74.2 |
| | 59.2 |
|
| Lease liabilities | | 9.6 |
| | 12.9 |
|
| Other liabilities | | 100.4 |
| | 108.3 |
|
| Total deferred tax assets before valuation allowance | | 2,888.7 |
| | 3,600.4 |
|
| Deferred tax asset valuation allowance | | (2,238.5 | ) | | (3,334.8 | ) |
| Net deferred tax assets | | 650.2 |
| | 265.6 |
|
| Deferred tax liabilities: | |
| |
|
| Property, plant and equipment and mineral rights | | (1.5 | ) | | (34.0 | ) |
| Investment in ventures | | (137.5 | ) | | (203.1 | ) |
| Intangible assets | | — |
| | (1.0 | ) |
| Product inventories | | (3.8 | ) | | (3.4 | ) |
| Intercompany notes | | (465.7 | ) | | — |
|
| Other assets | | (41.7 | ) | | (24.1 | ) |
| Total deferred tax liabilities | | (650.2 | ) | | (265.6 | ) |
| Net deferred tax assets (liabilities) | | $ | — |
| | $ | — |
|
At December 31, 2014 and 2013,2017, we had $267.7 million and $299.2 million, respectively, ofno gross deferred tax assetsasset related to U.S. alternative minimumAMT credits compared to $251.2 million at December 31, 2016. This deferred tax asset is now recorded as an income tax receivable as a result of the recently enacted income tax legislation allowing the credits that canto be carried forward indefinitely.refunded between the years 2019 through 2022.
We had gross domestic (including states) and foreign net operating loss carryforwards, inclusive of $1.9discontinued operations, of $4.2 billion and $6.0$7.2 billion, respectively, at December 31, 2014.2017. We had gross statedomestic and foreign net operating loss carryforwards at December 31, 20132016 of $157.9 million$3.7 billion and $3.5$6.9 billion, respectively. The U.S. Federal net operating losses will begin to expire in 2035 and state net operating losses will begin to expire in 2019. The foreign net operating losses will begin to expire in 2015.can be carried forward indefinitely. We had foreign tax credit carryforwards of $5.8 million at December 31, 20142017 and December 31, 2013.2016. The foreign tax credit carryforwards will begin to expire in 2020. Additionally, there is a net operating loss carryforward of $540.7 million for Alternative Minimum Tax. No benefit has been recorded in the financials for this attribute as ASC 740 does not allow for the recording of deferred taxes under alternative taxing systems. However, the future economic realizable benefit for this attribute is expected to be approximately $108.1 million.
We recorded a $1,361.0$1,096.3 million net increasedecrease in the valuation allowance of certain deferred tax assets where management believes that realization of the related deferred tax assets is not more likely than not.assets. Of this amount, a $18.2$465.7 million increasedecrease relates to ordinary losses of certain state operations for which future utilization is currently uncertain,impairment income on Luxembourg intercompany notes, a $291.0$407.5 million decrease relates to the reversal of our valuation allowance on MRRTdeferred tax creditsassets due to the repeal ofchange in the MRRT legislation,U.S. and Luxembourg statutory rates, a $28.6$235.3 million decrease relates to the change in available Alternative Minimum Tax credits after carrybackrepeal of AMT as a result of U.S. income tax reform and the remainder relates to current year losses. A $1,273.2 million increase relates to foreign deferred tax assets that management has determined it is more likely than not that the assets will not be realized. A $402.5 million increase relates to U.S. regular tax net operating losses where it has been determined that the full benefit of these losses will not be realized as we are perpetual Alternative Minimum taxpayers.activity.
At December 31, 2014,2017 and 2016, we had no cumulative undistributed earnings of foreign subsidiaries included in consolidated retained earnings. At December 31, 2013, cumulative undistributed earnings of foreign subsidiaries included in consolidated retained earnings amounted to $1.2 billion. The change in undistributed earnings resulted from transactions executed during 2014 which triggered the realization of losses with respect to the value in our investment in Cliffs Quebec Iron Mines. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | (In Millions) | | (In Millions) |
| | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Unrecognized tax benefits balance as of January 1 | | $ | 74.4 |
| | $ | 55.5 |
| | $ | 102.1 |
| | $ | 30.7 |
| | $ | 156.2 |
| | $ | 72.6 |
|
| Increases for tax positions in prior years | | 3.4 |
| | 13.6 |
| | 2.7 |
| |
| Increases for tax positions in current year | | 2.5 |
| | 5.3 |
| | 11.1 |
| |
| Increase due to foreign exchange | | (0.2 | ) | | — |
| | — |
| |
| Increase (decrease) for tax positions in prior years | | | (2.8 | ) | | (61.0 | ) | | 6.7 |
|
| Increase for tax positions in current year | | | 4.5 |
| | 0.2 |
| | 78.5 |
|
| Decrease due to foreign exchange | | | — |
| | — |
| | — |
|
| Settlements | | (0.5 | ) | | — |
| | (60.4 | ) | | 1.0 |
| | (64.7 | ) | | (1.1 | ) |
| Lapses in statutes of limitations | | (3.7 | ) | | — |
| | — |
| | — |
| | — |
| | (0.5 | ) |
| Other | | (1.2 | ) | | — |
| | — |
| | 0.1 |
| | — |
| | — |
|
| Unrecognized tax benefits balance as of December 31 | | $ | 74.7 |
| | $ | 74.4 |
| | $ | 55.5 |
| | $ | 33.5 |
| | $ | 30.7 |
| | $ | 156.2 |
|
At December 31, 20142017 and 2013,2016, we had $74.7$33.5 million and $74.4$30.7 million, respectively, of unrecognized tax benefits recorded. Of this amount, $25.2$6.1 million and $25.9$8.3 million, respectively, were recorded in Other liabilities and $49.5$27.4 million and $48.5$22.4 million, respectively, were recorded as Other non-current assets in the Statements of Consolidated Financial Position for both years. If the $74.7$33.5 million were recognized, the full amountonly $6.1 million would impact the effective tax rate. We do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve12 months. At December 31, 20142017 and 2013,2016, we had $2.1 million and $1.2$0.8 million, respectively, of accrued interest and penalties related to the unrecognized tax benefits recorded in Other liabilities in the Statements of Consolidated Financial Position.
On July 18, 2013, the FASB issued Accounting Standards Update No. 2013-11. Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). ASU 2013-11 requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions except where the deferred tax asset or other carryforward are not available for use. The adoption of the pronouncement does not have an impact in the presentation of our financial statement.
Tax years that2015 and forward remain subject to examination arefor the U.S. and tax years 20102013 and forward for the U.S., 2006Australia. Tax years 2008 and forward remain subject to examination for Canada, and 2007 and forward for Australia.Canada.
NOTE 10 - LEASE OBLIGATIONS
We lease certain mining, production and other equipment under operating and capital leases. The leases are for varying lengths, generally at market interest rates and contain purchase and/or renewal options at the end of the terms. Our operating lease expense was $20.6$7.1 million, $29.5$7.6 million and $25.8$12.0 million for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively. Capital lease assets were $92.7$37.4 million and $404.0$29.3 million at December 31, 20142017 and 2013,2016, respectively. The value of the capital lease assets in 2014 have decreased due to several factors including impairment charges of $140.4 million on our Asia Pacific Iron Ore, North American Coal and Eastern Canadian Iron Ore operations. Other factors involved are the announced exiting out of Eastern Canadian Iron Ore, additions/deletions of assets, depreciation, etc. Corresponding accumulated amortization of capital leases included in respective allowances for depreciation were $18.1$21.0 million and $198.5$13.1 million at December 31, 20142017 and 2013,2016, respectively.
Future minimum payments under capital leases and non-cancellable operating leases at December 31, 20142017 are as follows:
|
| | | | | | | |
| | (In Millions) |
| | Capital Leases | | Operating Leases |
| 2015 | $ | 84.8 |
| | $ | 12.0 |
|
| 2016 | 34.1 |
| | 9.3 |
|
| 2017 | 26.9 |
| | 8.4 |
|
| 2018 | 20.4 |
| | 6.8 |
|
| 2019 | 11.4 |
| | 4.8 |
|
| 2020 and thereafter | 21.0 |
| | 9.9 |
|
| Total minimum lease payments | $ | 198.6 |
| | $ | 51.2 |
|
| Amounts representing interest | 31.3 |
| | |
| Present value of net minimum lease payments | $ | 167.3 |
| (1) | |
|
| | | | | | | |
| | (In Millions) |
| | Capital Leases | | Operating Leases |
| 2018 | $ | 20.8 |
| | $ | 4.9 |
|
| 2019 | 12.1 |
| | 1.8 |
|
| 2020 | 11.1 |
| | 1.8 |
|
| 2021 | 10.5 |
| | 1.8 |
|
| 2022 | 2.1 |
| | 1.8 |
|
| 2023 and thereafter | — |
| | 7.5 |
|
| Total minimum lease payments | $ | 56.6 |
| | $ | 19.6 |
|
| Amounts representing interest | 8.8 |
| | |
Present value of net minimum lease payments1 | $ | 47.8 |
| | |
| | | | |
1 The total is comprised of $16.9 million and $30.9 million classified as Other current liabilities and Other liabilities, respectively, in the Statements of Consolidated Financial Position at December 31, 2017. |
| |
(1) | The total is comprised of $74.5 million and $92.8 million classified as Current portion of capital leases and Other liabilities, respectively, in the Statements of Unaudited Condensed Consolidated Financial Position at December 31, 2014.
|
NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
We had environmental and mine closure liabilities of $261.2$200.1 million and $321.0$206.8 million at December 31, 20142017 and 2013, respectively. Payments in 2014 and 2013 were $3.1 million and $8.2 million,2016, respectively. The following is a summary of the obligations as of December 31, 20142017 and 2013:2016:
| | | | (In Millions) | (In Millions) |
| | December 31, | December 31, |
| | 2014 | | 2013 | 2017 | | 2016 |
| Environmental | $ | 5.5 |
| | $ | 8.4 |
| $ | 2.9 |
| | $ | 2.8 |
|
| Mine closure | | | | | | |
| LTVSMC | 22.9 |
| | 22.0 |
| |
| Operating mines: | | | | |
| U.S. Iron Ore | 120.9 |
| | 152.2 |
| |
U.S. Iron Ore1 | | 168.4 |
| | 187.8 |
|
| Asia Pacific Iron Ore | 21.5 |
| | 25.5 |
| 28.8 |
| | 16.2 |
|
| North American Coal | 33.9 |
| | 34.7 |
| |
| Eastern Canadian Iron Ore | 56.5 |
| | 78.2 |
| |
| Total mine closure | 255.7 |
| | 312.6 |
| 197.2 |
| | 204.0 |
|
| Total environmental and mine closure obligations | 261.2 |
| | 321.0 |
| 200.1 |
| | 206.8 |
|
| Less current portion | 5.2 |
| | 11.3 |
| 3.6 |
| | 12.9 |
|
| Long-term environmental and mine closure obligations | $ | 256.0 |
| | $ | 309.7 |
| $ | 196.5 |
| | $ | 193.9 |
|
| | | | | |
1 U.S. Iron Ore includes our active operating mines, our indefinitely idled Empire mine and a closed mine formerly operating as LTVSMC. | | 1 U.S. Iron Ore includes our active operating mines, our indefinitely idled Empire mine and a closed mine formerly operating as LTVSMC. |
Environmental
Our mining and exploration activities are subject to various laws and regulations governing the protection of the environment. We conduct our operations to protect the public health and environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our environmental liabilities of $5.5$2.9 million and $8.4$2.8 million at December 31, 20142017 and 2013,2016, respectively, including obligations for known environmental remediation exposures at various active and closed mining operations and other sites, have been recognized based on the estimated cost of investigation and remediation at each site. If the cost can only can be estimated as a range of possible amounts with no specific amount being more likely, the minimum of the range is accrued. Future expenditures are not discounted unless the amount and timing of the cash disbursements are readily are known. Potential insurance recoveries have not been reflected. Additional environmental obligations could be incurred, the extent of which cannot be assessed.
As discussed in further detail below, the environmental liability recorded at December 31, 2014 and 2013 primarily is comprised of remediation obligations related to the Rio Tinto mine site in Nevada where we are named as a potentially responsible party.
The Rio Tinto Mine Site
The Rio Tinto Mine Site is a historic underground copper mine located near Mountain City, Nevada, where tailings were placed in Mill Creek; a tributary to the Owyhee River. Site investigation and remediation work is being conducted in accordance with a Consent Order dated September 14, 2001 between the NDEP and the Rio Tinto Working Group composed of the Company, Atlantic Richfield Company, Teck Cominco American Incorporated and E. I. duPont de Nemours and Company. The Consent Order provides for technical review by the U.S. Department of the Interior Bureau of Indian Affairs, the U.S. Fish and Wildlife Service, U.S. Department of Agriculture Forest Service, the NDEP and the Shoshone-Paiute Tribe of the Duck Valley Reservation (collectively, "Rio Tinto Trustees"). In recognition of the potential for an NRD claim, the parties actively pursued a global settlement that would include the EPA and encompass both the remedial action and the NRD issues.
The NDEP published a Record of Decision for the Rio Tinto Mine, which was signed on February 14, 2012 by the NDEP and the EPA. On September 27, 2012, the agencies subsequently issued a proposed Consent Decree, which was lodged with the U.S. District Court for the District of Nevada and opened for 30-day public comment on October 4, 2012. The Consent Decree was subsequently finalized on May 20, 2013. Under the terms of the Consent Decree, the Rio Tinto Working Group has agreed to pay over $29.0 million in cleanup costs and natural resource damages to the site and surrounding area. The Company's share of the total settlement cost, which includes remedial action, insurance and other oversight costs is $12.2 million, of which we have a remaining environmental liability of $2.5 million and $5.3
million in the Statements of Consolidated Financial Position as of December 31, 2014 and 2013, respectively, related to this issue.
Under the terms of the Consent Decree, the Rio Tinto Working Group will be responsible for removing mine tailings from Mill Creek, improving the creek to support redband trout and improving water quality in Mill Creek and the East Fork Owyhee River. Previous cleanup projects included filling in old mine shafts, grading and covering leach pads and tailings, and building diversion ditches. NDEP will oversee the cleanup, with input from EPA and monitoring from the nearby Shoshone-Paiute Tribes of Duck Valley.
Mine Closure
Our mine closure obligations of $255.7$197.2 million and $312.6$204.0 million at December 31, 20142017 and 2013,2016, respectively, include our five consolidated U.S. operating iron oreIron Ore mines and our Asia Pacific operating iron ore mine, our two operating North American coal mines, our two Eastern Canadian iron ore mines and a closed operation formerly operating as LTVSMC. Additionally, included in the December 31, 2013 mine closure obligation are the mine closure obligations related to the three mines at our CLCC operations. The CLCC assets were sold during the fourth quarter of 2014. As disclosed, at the end of March 2014, we idled our Wabush Scully mine in Newfoundland and Labrador and in the fourth quarter we began to implement the permanent closure plan for theIron Ore mine. Additionally, we disclosed in November 2014 that we were pursuing exit options for our Bloom Lake mine and as disclosed in January 2015, active production at Bloom Lake mine has completely ceased and the mine has transitioned to "care-and-maintenance" mode.
Management periodically performs an assessment of the obligation to determine the adequacy of the liability in relation to the closure activities still required at the LTVSMC site. The LTVSMC closure liability was $22.9 million and $22.0 million at December 31, 2014 and 2013, respectively. MPCA is presently working on an NPDES permit reissuance for this facility that could modify the closure liability, but the scale of that change will not be understood until the permit has been drafted and issued.
The accrued closure obligation for our active mining operations provides for contractual and legal obligations associated with the eventual closure of the mining operations. We performed a detailed assessment of our asset retirement obligations related to our active mining locations most recently in 2014, except for Bloom Lake,2017 in accordance with our accounting policy, which requires us to perform an in-depth evaluation of the liability every three years in addition to routine annual assessments. TheIn 2017, we employed a third-party specialist to assist in the evaluation.
Management periodically performs an assessment of the obligation to determine the adequacy of the liability in relation to the closure activities still required at the LTVSMC site, most recent assessment for Bloom Lake wasrecently performed in 2012.detail during 2017. The LTVSMC closure liability was $28.6 million and $25.5 million at December 31, 2017 and 2016, respectively. We are anticipating MPCA to reissue the NPDES permits for this facility in the future that could modify the closure liability, but the scale of that change will not be understood until reissuance of the permits.
For the assessments performed, we determined the obligations based on detailed estimates adjusted for factors that a market participant would consider (i.e., inflation, overhead and profit) and then discounted the obligation using the current credit-adjusted risk-free interest rate based on the corresponding life of mine. The estimate also incorporates incremental increases in the closure cost estimates and changes in estimates of mine lives. The closure date for each locationof our active operating U.S. Iron Ore mines was determined based on the exhaustion date of the remaining iron ore reserves. The closure date and expected timing of the capital requirements to meet our obligations for our Asia Pacific Iron Ore mine, and our other indefinitely idled or closed mines, is determined based on the unique circumstances of each property. The accretion of the liability and amortization of the related asset is recognized over the estimated mine lives for each location.
The following represents a roll forward of our asset retirement obligation liability related to our active mining locations for the years ended December 31, 20142017 and 2013:2016:
| | | | (In Millions) | (In Millions) |
| | December 31, | December 31, |
| | 2014 | | 2013 | 2017 | | 2016 |
| Asset retirement obligation at beginning of period | $ | 290.6 |
| | $ | 231.1 |
| |
| Asset retirement obligation at beginning of year | | $ | 204.0 |
| | $ | 230.4 |
|
| Accretion expense | 14.5 |
| | 18.1 |
| 14.9 |
| | 14.0 |
|
| Remediation payments | | (5.6 | ) | | (2.2 | ) |
| Exchange rate changes | (2.4 | ) | | (3.4 | ) | 1.5 |
| | (0.2 | ) |
| Revision in estimated cash flows | (65.2 | ) | | 44.8 |
| (17.6 | ) | | (38.0 | ) |
| Disposal of CLCC Assets | (4.7 | ) | | $ | — |
| |
| Asset retirement obligation at end of period | $ | 232.8 |
| | $ | 290.6 |
| |
| Asset retirement obligation at end of year | | $ | 197.2 |
| | $ | 204.0 |
|
The revisionsrevision in estimated cash flows recorded during the year ended December 31, 20142017 relate primarily to a downward revisionupdates to our estimates resulting from our three-year in-depth review of estimatedour asset retirement costsobligations for oneeach of our U.S. mines. The primary driver of the decrease in estimated cash flows was the Empire mine, as the asset retirement obligation was reduced $26.2 million as a result of the refinement of the cash flows required for reclamation, remediation and structural removal. Prior estimates were based on RS Means (a common costing methodology used in the construction and demolition industry) costing data while the current estimate was compiled using a more detailed cost build-up approach. The overall decrease in estimated cash flows for our U.S. Iron Ore mines associated with required storm water management systems. The mine life was extended during 2014, effectively converting certain asset retirementoffset partially by an increase in costs of $10.1 million relating to the refinement of expected costs to capital costs overbe incurred at the remaining life-of-mine. The reduction in estimated cash flows was also attributable to theend of life of mine life for one of the Eastern Canadianat our Asia Pacific Iron Ore mines being shortened by seven years along with a decrease in the inflation rate causing additional downward revisionsoperations.
The revision in estimated cash flows recorded during the year ended December 31, 2014.
For2016 relate primarily to revisions in the year ended December 31, 2013,timing of the revisions in estimated cash flows recorded during the year primarily included estimated asset retirement costs for oneat two of our U.S. Iron Ore mines associated withmines. The Empire mine asset retirement obligation was reduced $29.6 million as a result of the further refinement of the timing of cash flows and a downward revision of estimated cost of required storm water management systems expected to be implemented subsequent toimplemented. Additionally, during 2016, a new economic reserve estimate was completed for United Taconite, increasing salable product reserves by 115 million long tons and consequently significantly increasing the closure oflife-of-mine plan, resulting in a $9.2 million decrease in the mine, as described above.asset retirement obligation.
NOTE 12 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
Goodwill
Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies and is not subject to amortization. We assign goodwill arising from acquired companies to the reporting units that are expected to benefit from the synergies of the acquisition. Our reporting units are either at the operating segment level or a component one level below our operating segments that constitutes a business for which management generally reviews production and financial results of that component. Decisions often are made as to capital expenditures, investments and production plans at the component level as part of the ongoing management of the related operating segment. We have determined that our Asia Pacific Iron Ore and Ferroalloys operating segments constitute separate reporting units, that CQIM and Wabush within our Eastern Canadian Iron Ore operating segment constitute reporting units and that Northshore within our U.S. Iron Ore operating segment constitutes a reporting unit. Goodwill is allocated among and evaluated for impairment at the reporting unit level in the fourth quarter of each year or as circumstances occur that potentially indicate that the carrying amount of these assets may exceed their fair value.
During the third quarter of 2014, a goodwill impairment charge of $73.5 million was recorded for our Asia Pacific Iron Ore reporting segment. The impairment charge was a result of downward long-term pricing estimates as determined through management's long-range planning process.
During the fourth quarter of 2013, upon performing our annual goodwill impairment test, a goodwill impairment charge of $80.9 million was recorded for our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment. The impairment charge was primarily a result of the decision made in the fourth quarter of 2013 to indefinitely suspend the Chromite Project and to not allocate additional capital for the project given the uncertain timeline and risks associated with the development of necessary infrastructure to bring the project online.
Refer to NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.
The following table summarizes changes in the carrying amount of goodwill allocated by operating segment for the years ended December 31, 20142017 and December 31, 2013:2016 was $2.0 million and related to our U.S. Iron Ore operating segment.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| | December 31, 2014 | | December 31, 2013 |
| | U.S. Iron Ore | | Eastern Canadian Iron Ore | | Asia Pacific
Iron Ore | | Other | | Total | | U.S. Iron Ore | | Eastern Canadian Iron Ore | | Asia Pacific Iron Ore | | Other | | Total |
| Beginning Balance | $ | 2.0 |
| | $ | — |
| | $ | 72.5 |
| | $ | — |
| | $ | 74.5 |
| | $ | 2.0 |
| | $ | — |
| | $ | 84.5 |
| | $ | 80.9 |
| | $ | 167.4 |
|
| Arising in business combinations | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Impairment | — |
| | — |
| | (73.5 | ) | | — |
| | (73.5 | ) | | — |
| | — |
| | — |
| | (80.9 | ) | | (80.9 | ) |
| Impact of foreign currency translation | — |
| | — |
| | 1.0 |
| | — |
| | 1.0 |
| | — |
| | — |
| | (12.0 | ) | | — |
| | (12.0 | ) |
| Ending Balance | $ | 2.0 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2.0 |
| | $ | 2.0 |
| | $ | — |
| | $ | 72.5 |
| | $ | — |
| | $ | 74.5 |
|
| Accumulated Goodwill Impairment Loss | $ | — |
| | $ | (1,000.0 | ) | | $ | (73.5 | ) | | $ | (80.9 | ) | | $ | (1,154.4 | ) | | $ | — |
| | $ | (1,000.0 | ) | | $ | — |
| | $ | (80.9 | ) | | $ | (1,080.9 | ) |
Other Intangible Assets and Liabilities
Following is a summary of the definite-lived intangible assets and liabilities as of December 31, 20142017 and December 31, 2013:2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (In Millions) |
| | | | December 31, 2014 | | December 31, 2013 |
| | Classification | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Definite-lived intangible assets: | | | | | | | | | | | | | |
| Permits | Other non-current assets | | $ | 79.2 |
| | $ | (16.5 | ) | | $ | 62.7 |
| | $ | 127.4 |
| | $ | (35.9 | ) | | $ | 91.5 |
|
| Utility contracts | Other non-current assets | | — |
| | — |
| | — |
| | 54.7 |
| | (53.1 | ) | | 1.6 |
|
| Leases | Other non-current assets | | — |
| | — |
| | — |
| | 2.4 |
| | (0.1 | ) | | 2.3 |
|
| Total intangible assets | | | $ | 79.2 |
| | $ | (16.5 | ) | | $ | 62.7 |
| | $ | 184.5 |
| | $ | (89.1 | ) | | $ | 95.4 |
|
| Below-market sales contracts | Other current liabilities | | $ | (23.0 | ) | | $ | — |
| | $ | (23.0 | ) | | $ | (23.0 | ) | | $ | — |
| | $ | (23.0 | ) |
| Below-market sales contracts | Other liabilities | | (205.9 | ) | | 182.8 |
| | (23.1 | ) | | (205.9 | ) | | 159.7 |
| | (46.2 | ) |
| Total below-market sales contracts | | | $ | (228.9 | ) | | $ | 182.8 |
| | $ | (46.1 | ) | | $ | (228.9 | ) | | $ | 159.7 |
| | $ | (69.2 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (In Millions) |
| | | | December 31, 2017 | | December 31, 2016 |
| | Classification | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Permits | Other non-current assets | | $ | 78.8 |
| | $ | (26.5 | ) | | $ | 52.3 |
| | $ | 78.4 |
| | $ | (24.6 | ) | | $ | 53.8 |
|
Amortization expense relating to other intangible assets was $10.4$2.1 million, $19.9$4.8 million and $22.5$4.2 million for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively, and is recognized in Cost of goods sold and operating expenses in the Statements of Consolidated Operations. During the year ended December 31, 2014, an impairment chargeAmortization expense of $15.5 million was recorded related to the permits intangible asset and is recognized in Impairment of goodwill and other long-lived assets in the Statements of Consolidated Operations. Additionally, during 2013, an impairment charge of $9.5 million was recorded related to the utility contracts intangible asset and was recognized in Impairment of goodwill and other long-lived assets. There was no impairment charge recorded for definite-lived intangible assets in 2012. The estimated amortization expense relatingis expected to intangible assets for each of the five succeeding years is as follows:
|
| | | |
| (In Millions) |
| Amount |
| Year Ending December 31 |
|
| 2015 | 4.1 |
|
| 2016 | 4.2 |
|
| 2017 | 4.0 |
|
| 2018 | 3.8 |
|
| 2019 | 3.5 |
|
| Total | $ | 19.6 |
|
The below-market sales contract is classified as a liability and recognized over the term of the underlying contract, which has a remaining life of approximately two years and expires December 31, 2016. For the years ended December 31, 2014, 2013 and 2012, we recognized $23.1 million, $45.9 million and $46.3 million, respectively, in Product revenues related to below-market sales contracts. The following amounts are estimatedcontinue to be recognized in Product revenues for each of the two succeeding fiscal years:immaterial going forward.
|
| | | |
| | (In Millions) |
| | Amount |
| Year Ending December 31 | |
| 2015 | 23.0 |
|
| 2016 | 23.1 |
|
| Total | $ | 46.1 |
|
NOTE 13 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The following table presents the fair value of our derivative instruments and the classification of each in the Statements of Consolidated Financial Position as of December 31, 20142017 and December 31, 2013:2016:
| | | | (In Millions) | (In Millions) |
| | Derivative Assets | | Derivative Liabilities | Derivative Assets | | Derivative Liabilities |
| | December 31, 2014 | | December 31, 2013 | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 |
Derivative Instrument | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| Derivatives designated as hedging instruments under ASC 815: | | | | | | | | | | | | | | | | | | | |
| Interest-Rate Swaps | | $ | — |
| | $ | — |
| | Other current liabilities | | $ | — |
| | $ | 2.1 |
| |
| Foreign Exchange Contracts | Other current assets | | — |
| | Other current assets | | 0.3 |
| | Other current liabilities | | 21.6 |
| | Other current liabilities | | 25.8 |
| |
| Total derivatives designated as hedging instruments under ASC 815 | | $ | — |
| | $ | 0.3 |
| | $ | 21.6 |
| | $ | 27.9 |
| |
| Commodity Contracts | | | $ | — |
| | $ | — |
| | Other current liabilities | | $ | 0.3 |
| | $ | — |
|
| Derivatives not designated as hedging instruments under ASC 815: | | | | | | | | | | | | | | | | |
| Foreign Exchange Contracts | | $ | — |
| | $ | — |
| | Other current liabilities | | $ | 9.9 |
| | Other current liabilities | | $ | 1.1 |
| |
| Customer Supply Agreements | Other current assets | | 63.2 |
| | Other current assets | | 55.8 |
| | — |
| | — |
| Derivative assets | | $ | 37.9 |
| | Derivative assets | | $ | 21.3 |
| | $ | — |
| | $ | — |
|
| Provisional Pricing Arrangements | Other current assets | | — |
| | Other current assets | | 3.1 |
| | Other current liabilities | | 11.8 |
| | Other current liabilities | | 10.3 |
| Derivative assets | | 1.5 |
| | Derivative assets | | 10.3 |
| | Other current liabilities | | 2.4 |
| | Other current liabilities | | 0.5 |
|
| Commodity Contracts | | | — |
| | Derivative assets | | 1.5 |
| | — |
| | — |
|
| Total derivatives not designated as hedging instruments under ASC 815: | | $ | 63.2 |
| | $ | 58.9 |
| | $ | 21.7 |
| | $ | 11.4 |
| | $ | 39.4 |
| | $ | 33.1 |
| | $ | 2.4 |
| | $ | 0.5 |
|
| Total derivatives | | $ | 63.2 |
| | $ | 59.2 |
| | $ | 43.3 |
| | $ | 39.3 |
| | $ | 39.4 |
| | $ | 33.1 |
| | $ | 2.7 |
| | $ | 0.5 |
|
Derivatives Designated as Hedging Instruments
Cash Flow Hedges
Australian and Canadian Dollar Foreign Exchange Contracts
We are subject to changes in foreign currency exchange rates as a result of our operations in Australia and Canada. With respect to Australia, foreign exchange risk arises from our exposure to fluctuations in foreign currency exchange rates because the functional currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore sales. The functional currency of our Canadian operations is the U.S. dollar; however, the production costs for these operations primarily are incurred in the Canadian dollar.
We use foreign currency exchange contracts to hedge our foreign currency exposure for a portion of our U.S. dollar sales receipts in our Australian functional currency entities and our entities with Canadian dollar operating costs. For our Australian operations, U.S. dollars are converted to Australian dollars at the currency exchange rate in effect during the period the transaction occurred. For our Canadian operations, U.S. dollars are converted to Canadian dollars at the exchange rate in effect for the period the operating costs are incurred. The primary objective for the use of these instruments is to reduce exposure to changes in currency exchange rates and to protect against undue adverse movement in these exchange rates. If the instruments qualify for hedge accounting treatment, they are tested for effectiveness at inception and at least once each reporting period. If and when any of our contracts that had qualified for hedge accounting treatment are determined not to be highly effective as hedges, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued.
As of December 31, 2014,2017, we had outstanding Australian foreign currency exchangenatural gas hedge contracts withfor a notional amountsamount of $220.03.5 million MMBtu in the form of forward contracts with varying maturity dates ranging from January 20152018 to October 2015.November 2018. We had no Canadian foreign currency exchangenatural gas hedge contracts that were considered cash flow hedges andas of December 31, 2016 that qualified for hedge accounting treatment at December 31, 2014, as during the fourth quarter of 2014 the Canadian foreign currency exchange contracts were de-designated. The de-designation of the Canadian hedge contracts is discussed below. This compares with outstanding Australian and Canadian foreign currency exchange contracts with a notional amount of $323.0 million and $285.9 million, respectively, as of December 31, 2013.
accounting. Changes in fair value of highly effective hedges are recorded as a component of Accumulated other comprehensive loss in the Statements of Consolidated Financial Position. Any ineffectiveness is recognized immediatelyDuring the year ended December 31, 2017, we recorded an unrealized loss of $0.5 million in income.Other comprehensive income (loss) for changes in the fair value of these instruments. As of December 31, 2014 and 2013, there was2017 no material ineffectiveness recorded for foreign exchange contracts that were classified as cash flow hedges. However, Canadian hedge contracts related to the Bloom Lake operations were deemed ineffective during the fourth quarter of 2014 and no longer qualified for hedge accounting treatment. The Canadian hedge contracts de-designated in the fourth quarter of 2014 were all that remained of the Canadian hedge contracts. Canadian hedge contracts associated with the Wabush and Ferroalloys operations were deemed ineffective during the fourth quarter of 2013 and no longer qualified for hedge accounting treatment. All of the hedges designated in the fourth quarter of 2013 settled and were no longer outstanding by June 30, 2014. The de-designated hedges are discussed within the Derivatives Not Designated as Hedging Instruments section of this footnote. Amounts recorded as a component of Accumulated other comprehensive loss areamounts have been reclassified into earnings in the same period the forecasted transactions affect earnings. Of the amounts remaining in Accumulated other comprehensive loss related to Australian hedge contracts, we estimate that losses of $15.1 million (net of tax), respectively, will be reclassified into earnings within the next 12 months. No amounts remain in Accumulated other comprehensive loss related to Canadian hedge contracts.
Interest Rate Risk Management
Interest rate risk is managed using a portfolio of variable-rate and fixed-rate debt composed of short-term and long-term instruments, such as U.S. treasury lock agreements and variable-to-fixed interest rate swaps. From time to time, these instruments, which are derivative instruments, are entered into to facilitate the maintenance of the desired ratio of variable-rate to fixed-rate debt.
In the second quarter of 2012, we entered into U.S. treasury lock agreements with a notional value of $200.0 million to hedge the exposure to the possible rise in the interest rate prior to the issuance of the five-year senior notes due 2018 discussed in NOTE 5 - DEBT AND CREDIT FACILITIES. These derivative instruments were designated and qualified as cash flow hedges. The U.S. treasury locks were settled in the fourth quarter of 2012 upon the issuance of $500.0 million principal amount of the senior notes due 2018 for a cumulative after-tax loss of $1.3 million, which was recorded in Accumulated other comprehensive loss and is being amortized to Other non-operating income (expense) over the life of the senior notes due 2018. Approximately $0.1 million net of tax was recognized in earnings in both 2013 and 2014 and approximately $0.1 million net of tax is expected to be recognized in earnings in 2015.
The following summarizes the effect of our derivatives designated as cash flow hedging instruments, net of tax in Accumulated other comprehensive loss in the Statements of Consolidated Operations for the years ended December 31, 2014, 2013 and 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| Derivatives in Cash Flow | Amount of Gain (Loss) Recognized in OCI on Derivative | | Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Earnings |
| Hedging Relationships | (Effective Portion) | | (Effective Portion) | | (Effective Portion) |
| | Year Ended
December 31, | | | | Year Ended
December 31, |
| | 2014 | | 2013 | | 2012 | | | | 2014 | | 2013 | | 2012 |
Australian Dollar Foreign Exchange Contracts (hedge designation) | $ | (13.9 | ) | | $ | (34.7 | ) | | $ | 20.2 |
| | Product revenues | | $ | (13.2 | ) | | $ | (11.9 | ) | | $ | 14.8 |
|
Canadian Dollar Foreign Exchange Contracts (hedge designation) | — |
| | (12.9 | ) | | 6.7 |
| | Cost of goods sold and operating expenses | | — |
| | (8.2 | ) | | 3.3 |
|
Canadian Dollar Foreign
Exchange Contracts
(prior to de-designation) | (14.3 | ) | | (4.1 | ) | | — |
| | Cost of goods sold and operating expenses | | (17.7 | ) | | (1.9 | ) | | — |
|
| Treasury Locks | — |
| | — |
| | (1.3 | ) | | Other non-operating income (expense) | | (0.1 | ) | | (0.1 | ) | | — |
|
| Total | $ | (28.2 | ) | | $ | (51.7 | ) | | $ | 25.6 |
| | | | $ | (31.0 | ) | | $ | (22.1 | ) | | $ | 18.1 |
|
Derivatives Not Designated as Hedging Instruments
Foreign Exchange Contracts
During the fourth quarter of 2014, we discontinued hedge accounting for Canadian foreign currency exchange contracts for all outstanding contracts associated with Bloom Lake operations as projected future cash flows were no longer considered probable or reasonably possible, but we continued to hold these instruments as economic hedges to manage currency risk. Subsequent to de-designation, no further foreign currency exchange contracts were entered into for the Bloom Lake operations. As of December 31, 2014,the de-designated outstanding foreign exchange rate contracts had a notional amount of $183.0 million in the form of forward contracts with varying maturity dates ranging from January 2015 to September 2015.
The amounts that were previously recorded as a component of Accumulated other comprehensive loss prior to de-designation and remaining in Accumulated other comprehensive loss as of December 31, 2014 were reclassified to earnings upon the de-designation of the hedges as the hedges would not be effective prospectively due to the projected future cash flows associated with the hedges no longer being considered probable or reasonably possible. We reclassified losses of $7.3 million from Accumulated other comprehensive loss related to contracts that had not matured during the year, and recorded the amountsinto earnings.
Derivatives Not Designated as Cost of goods sold and operating expenses on the Statements of Consolidated Operations. A corresponding realized gain or loss will be recognized in each period until settlement of the related economic hedge in 2015. Additionally, for the year ended December 31, 2014, prior to the de-designation of the Bloom Lake hedges, we reclassified losses of $9.9 million from Accumulated other comprehensive loss related to contracts that matured during the year, and recorded the amounts as Cost of goods sold and operating expenses on the Statements of Consolidated Operations. As of December 31, 2014, no gains or losses remain in Accumulated other comprehensive loss related to the Bloom Lake effective cash flow hedge contracts prior to de-designation.
During the fourth quarter of 2013, we discontinued hedge accounting for Canadian foreign currency exchange contracts for all outstanding contracts associated with Wabush and Ferroalloys operations as projected future cash flows were no longer considered probable, but we continued to hold these instruments as economic hedges to manage currency risk. Subsequent to de-designation, no further foreign currency exchange contracts were entered into for the Wabush operation or the Ferroalloys operations. As of December 31, 2014, there were no outstanding de-designated foreign currency exchange rate contracts associated with the Wabush and Ferroalloys operations as all remaining de-designated foreign exchange contracts matured during the second quarter of 2014. This compares with outstanding de-designated foreign currency exchange contracts with a notional amount of $74.8 million as of December 31, 2013.
As a result of discontinued hedge accounting, the Wabush and Ferroalloys instruments were prospectively marked to fair value each reporting period through Cost of goods sold and operating expenses on the Statements of Consolidated Operations. For the years ended December 31, 2014, and 2013, the change in fair value of our de-designated foreign currency exchange contracts resulted in net losses of $3.3 million and $0.6 million, respectively. The amounts that were previously recorded as a component of Accumulated other comprehensive loss prior to de-designation were reclassified to earnings and a corresponding realized gain or loss was recognized when the forecasted cash flow occurred. For the years ended December 31, 2014, and 2013, we reclassified losses of $0.5 million and $1.9 million, respectively from Accumulated other comprehensive loss related to contracts that matured during the year, and recorded the amounts as Cost of goods sold and operating expenses on the Statements of Consolidated Operations. All the remaining contracts matured during the second quarter of 2014 and as of the period ended June 30, 2014, no gains or losses remained in Accumulated other comprehensive loss related to the effective cash flow hedge contracts prior to de-designation.
Fair Value Hedges
Interest Rate Hedges
Our fixed-to-variable interest rate swap derivative instruments, with a notional amount of $250.0 million, were de-designated and settled during August 2014. Prior to settlement, the derivatives were designated and qualified as fair value hedges. The objective of the hedges was to offset changes in the fair value of our debt instruments associated with fluctuations in the benchmark LIBOR interest rate as part of our risk management strategy.
Prior to de-designation and settlement, when the interest rate swap derivative instruments were designated and qualified as fair-value hedges, the gain or loss on the hedge instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk were recognized in net income. We included the gain or loss on the derivative instrument and the offsetting loss or gain on the hedged item in Other non-operating income (expense). The net gains recognized in Other non-operating income (expense) for the year ended December 31, 2014 were $0.3 million.
For the year ended December 31, 2013, the fixed-to-variable interest rate swap derivative instruments were designated and qualified as fair-value hedges. The gain or loss on the hedge instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk was recognized in net income. We included the gain or loss on the derivative instrument and the offsetting loss or gain on the hedged item in Other non-operating income (expense). The net gain recognized in Other non-operating income (expense) for year ended December 31, 2013 was $0.1 million.Hedging Instruments
Customer Supply Agreements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors. The base price is the primary component of the purchase price for each contract. The indexed price adjustment factors are integral to the iron ore supply contracts and vary based on the agreement, but typically include adjustments based upon changes in the Platts 62 percent Fe fines spot price and/or62% Price, along with pellet premiums, published Platts international pellet pricesindexed freight rates and changes in specified Producer Price Indices, including those for all commodities, industrial commodities, energyfuel and steel. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. In most cases, these adjustment factors have not been finalized at the time our product is sold. In these cases, we historically have estimated the adjustment factors at each reporting period based upon the best third-party information available. The estimates are then adjusted to actual when the information has been finalized. The price adjustment factors have been evaluated to determine if they contain embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host contract and are integral to the host contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.
A certainCertain supply agreementagreements with one U.S. Iron Ore customer providesprovide for supplemental revenue or refunds to the customer based on the customer’scustomer's average annual steel pricing or based on the average annual daily steel market price for hot-rolled coil steel at the time the product is consumed in the customer’s blast furnace. In the new contract which commenced in 2017, this supplemental revenue and refund data source changes from the customer's average annual steel price to an average annual daily market price for hot-rolled coil steel. The supplemental pricing is characterized as a freestanding derivative and is required to be accounted for separately once the product is shipped. The derivative instrument, which is finalized based on a future price, is adjusted to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled.
We recognized $187.8$163.3 million, $149.2$41.7 million and $171.4$27.1 million as Product revenues in the Statements of Consolidated Operations for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively, related to the supplemental payments. Other currentDerivative assets, representing the fair value of the pricing factors,supplemental revenue, were $63.2$37.9 million and $55.8$21.3 million in theas of December 31, 20142017 and December 31, 20132016, respectively, in the Statements of Consolidated Financial Position, respectively.Position.
Provisional Pricing Arrangements
Certain of our U.S. Iron Ore and Asia Pacific Iron Ore and Eastern Canadian Iron Ore customer supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be based on certain market inputs at a specified period in time in the future, per the terms of the supply agreements. Market inputs are tied to indexed price adjustment factors that are integral to the iron ore supply contracts and vary based on the agreement. The pricing mechanisms typically include adjustments based upon changes in the Platts 62% Price, along with pellet premiums, published Platts international indexed freight rates and changes in specified Producer Price Indices, including those for industrial commodities, fuel and steel. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement.
U.S. Iron Ore sales revenue is primarily recognized when cash is received. For U.S. Iron Ore sales, the difference between the provisionally agreed-upon price and the estimated final revenue rate is characterized as a freestanding derivative and is required tomust be accounted for separately once the provisional revenue has been recognized. Asia Pacific Iron Ore sales revenue is recorded initially at the provisionally agreed-upon price with the pricing provision embedded in the receivable. The pricing provision is not clearly and closely related to the economic characteristics of the host receivable; therefore, the pricing provision is an embedded derivative instrument isthat must be bifurcated and accounted for separately from the receivable. Subsequently, the derivative instruments for both U.S. Iron Ore and Asia Pacific Iron Ore are adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rate is determined.
At December 31, 20142017, we had norecorded $1.5 million as Derivative assets and $2.4 million as derivative liabilities classified asOther current assetsliabilities recordedrelated to our estimate of the final revenue rate for our U.S. Iron Ore and Asia Pacific Iron Ore customers in the Statements of Consolidated Financial PositionPosition. At December 31, 2016, we recorded $10.3 million as Derivative assets and $0.5 million as derivative liabilities classified as Other current liabilities related to our estimate of the final revenue rate with any of our customers. At December 31, 2013, we recorded $3.1 million as Other current assetsU.S. Iron Ore and Asia Pacific Iron Ore customers in the Statements of Consolidated Financial Position related to our estimate of final revenue rate with our U.S. Iron Ore, Asia Pacific Iron Ore and Eastern Canadian Iron Ore customers. At December 31, 2014 and December 31, 2013, we recorded $11.8 million and $10.3 million, respectively, as Other current liabilities in the Statements of Consolidated Financial Position related to our estimate of final revenue rate with our U.S. Iron Ore, Asia Pacific Iron Ore and Eastern Canadian Iron Ore customers.Position. These amounts represent the difference between the provisional price agreed upon with our customers based on the supply agreement terms and our estimate of the final revenue rate based on the price calculations established in the supply agreements. As a result, weWe recognized a net $11.8decrease of $58.6 million decrease in Product revenues
in the Statements of Consolidated Operations for the year ended December 31, 20142017 related to these arrangements. This compares with a net $7.2increase of $49.0 million and net decrease and a net $7.8of $1.4 million decrease in Product revenues for the comparable periods in 20132016 and 2012.2015, respectively.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Consolidated Operations for the years ended December 31, 2014, 20132017, 2016 and 2012:2015:
| | (In Millions) | | Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivative | Amount of Gain/(Loss) Recognized in Income on Derivative | Location of Gain (Loss) Recognized in Income on Derivative | |
| | | Year Ended
December 31, | | Year Ended
December 31, |
| | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Customer Supply Agreements | | Product revenues | $ | 163.3 |
| | $ | 41.7 |
| | $ | 27.1 |
|
| Provisional Pricing Arrangements | | Product revenues | (58.6 | ) | | 49.0 |
| | (1.4 | ) |
| Foreign Exchange Contracts | Cost of goods sold and operating expenses | $ | (16.9 | ) | | $ | (0.6 | ) | | $ | — |
| Other non-operating income (expense) | — |
| | — |
| | (3.6 | ) |
| Foreign Exchange Contracts | Other income (expense) | — |
| | — |
| | 0.3 |
| Product revenues | — |
| | — |
| | (12.6 | ) |
| Foreign Exchange Contracts | Income and Gain on Sale from Discontinued Operations, net of tax | — |
| | — |
| | (0.3 | ) | |
| Treasury Locks | Other non-operating income (expense) | — |
| | — |
| | (0.4 | ) | |
| Customer Supply Agreements | Product revenues | 187.8 |
| | 149.2 |
| | 171.4 |
| |
| Provisional Pricing Arrangements | Product revenues | (11.8 | ) | | (7.2 | ) | | (7.8 | ) | |
| Commodity Contracts | | Cost of goods sold and operating expenses | — |
| | 1.9 |
| | (4.0 | ) |
| Total | | $ | 159.1 |
| | $ | 141.4 |
| | $ | 163.2 |
| | $ | 104.7 |
| | $ | 92.6 |
| | $ | 5.5 |
|
Refer to NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS for additional information.
NOTE 14 - DISCONTINUED OPERATIONS
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. The standard requires that an entity report as a discontinued operation only a disposal that represents a strategic shift in operations that has a major effect on its operations and financial results. ASU 2014-08 is effective prospectively for new disposals that occur within annual periods beginning on or after December 15, 2014. Early adoption is permitted and we adopted ASU 2014-08 during the three months ended December 31, 2014. Adoption of the standard had a material impact on our Statements of Consolidated Operations.
The Wabush mine was idled by the end of the first quarter of 2014 and we subsequently began to commence permanent closure during the fourth quarter of 2014. As part of these closure activities, we terminated the rail transportation agreement and began implementation of the provincial Rehabilitation and Closure Plan that has been approved by the Canadian Department of Natural Resources.As such, the Wabush mine wasdeemedabandoned as of December 31, 2014 and meets the disposed by other than sale criteria.
On December 31, 2014, we completed the sale of our CLCC assets in West Virginia to Coronado Coal II, LLC, an affiliate of Coronado Coal LLC, for $174.0 million in cash and the assumption of certain liabilities,of which $155.0 million has been collected as of December 31, 2014. We recorded the results of this sale in our fourth quarter earnings as the transaction closed on December 31, 2014. As such, CLCC as of December 31, 2014, meets the disposed of by sale criteria.
As Wabush and CLCC met criteria for discontinued operations, each disposal had to be further evaluated to determine whether the disposal represents a strategic shift that has (or will have) a major effect on our operations and financial results. Wabush and CLCC meet the criteria for discontinued operations as Wabush's closure plan was implemented and CLCC was sold. According to ASU 2014-08, examples of a strategic shift that has (or will have) a major effect on an entity’s operations and financial results could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity. In order to determine if the disposal of CLCC or Wabush had a major effect on our operations and financial results, we used revenues and assets as a key indicator of significance as those are historically key indicators we have used to measure our components against. For both Wabush and CLCC, the associated revenues and assets were determined not to be a significant percentage of our consolidated results as evidenced by the years ended December 31, 2014, 2013 and 2012. Wabush revenues were less than 8 percent of consolidated revenues and less than 4 percent of total assets for the years ended December 31, 2014, 2013 and 2012. CLCC revenues were less than 5 percent of consolidated revenues and less than 8 percent of total assets for the years ended December 31, 2014, 2013 and 2012.
Other key indicators such as sales margin, EBITDA and adjusted EBITDA are not relevant for Wabush as Wabush was idled in the first quarter of 2014 and therefore not operational for the majority of 2014. These other key indicators were also not relevant for CLCC as the coal business makes up a small percentage of our overall financial results, approximately 15 percent of consolidated revenues in 2014, as compared to our iron ore business.
After assessing Wabush and CLCC under the ASU 2014-08 guidance as discussed above, it was determined that Wabush and CLCC do not qualify as discontinued operations as of December 31, 2014. Neither Wabush nor CLCC represent a strategic shift that has or will have a major impact on our operations or financial results.
The amendments in this ASU 2014-08 require us to provide the Income (Loss) from Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures for each individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The Income (Loss) from Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures is to be presented for the component of an entity for the period in which it is disposed of or is classified as held for sale and for all prior periods that are presented in the Statements of Consolidated Operations. As required, the Income (Loss) from Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures for Wabush and CLCC are presented below:
|
| | | | | | | | | | | |
| | (In Millions) |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY INCOME (LOSS) FROM VENTURES | | | | | |
| Wabush | $ | (345.6 | ) | | $ | (258.6 | ) | | $ | (131.8 | ) |
| CLCC | $ | (669.9 | ) | | $ | (55.0 | ) | | $ | (41.8 | ) |
The tableinformation below sets forth selected financial information related to operating results of our businessbusinesses classified as discontinued operations. While the reclassification of revenues and expenses related to discontinued operations forfrom prior periods hashave no impact upon previously reported net income, the Statements of Consolidated Operations present the revenues and expenses that were reclassified from the specified line items to discontinued operations. During
The chart below provides an asset group breakout for each financial statement line impacted by discontinued operations:
|
| | | | | | | | | | | | | | | | | | |
| (In Millions) |
| | | | | Canadian Operations | | | |
| | | North American Coal | | Eastern Canadian Iron Ore | Other | Total Canadian Operations | | Total Discontinued Operations |
| Statements of Consolidated Operations |
| Gain (Loss) from Discontinued Operations, net of tax | YTD
December 31, 2017 | $ | 2.6 |
| | $ | (21.3 | ) | $ | — |
| $ | (21.3 | ) | | $ | (18.7 | ) |
| Loss from Discontinued Operations, net of tax | YTD
December 31, 2016 | $ | (2.4 | ) | | $ | (17.5 | ) | $ | — |
| $ | (17.5 | ) | | $ | (19.9 | ) |
| Loss from Discontinued Operations, net of tax | YTD
December 31, 2015 | $ | (152.4 | ) | | $ | (638.7 | ) | $ | (101.0 | ) | $ | (739.7 | ) | | $ | (892.1 | ) |
| | | | | | | | | |
| Statements of Consolidated Financial Position |
| Other current liabilities | As of
December 31, 2017 | $ | 3.2 |
| | $ | — |
| $ | — |
| $ | — |
| | $ | 3.2 |
|
| Other current liabilities | As of
December 31, 2016 | $ | 6.0 |
| | $ | — |
| $ | — |
| $ | — |
| | $ | 6.0 |
|
| | | | | | | | | |
| Non-Cash Operating and Investing Activities |
| Depreciation, depletion and amortization | YTD
December 31, 2015 | $ | 3.2 |
| | $ | — |
| $ | — |
| $ | — |
| | $ | 3.2 |
|
| Purchase of property, plant and equipment | YTD
December 31, 2015 | $ | 15.9 |
| | $ | — |
| $ | — |
| $ | — |
| | $ | 15.9 |
|
| Impairment of long-lived assets | YTD
December 31, 2015 | $ | 73.4 |
| | $ | — |
| $ | — |
| $ | — |
| | $ | 73.4 |
|
North American Coal Operations
Background
As of March 31, 2015, management determined that our North American Coal operating segment met the criteria to be classified as held for sale under ASC 205, Presentation of Financial Statements. The North American Coal segment continued to meet the criteria throughout 2015 until we sold our North American Coal operations during the fourth quarter of 2012,2015. As such, all current and historical North American Coal operating segment results are classified as discontinued operations in our financial statements. Historical results also include our CLCC assets, which were sold during the fourth quarter of 2014.
In the first quarter of 2015, as part of the held for sale classification assigned to North American Coal, an impairment of $73.4 million was recorded. The impairment charge was to reduce the assets to their estimated fair value which was determined based on potential sales scenarios. No further impairment was recorded in 2015.
On December 22, 2015, we soldcompleted a strategic shift in our 45 percent economic interest in Sonoma. The Sonoma operations previously were included in Other within our reportable segments.
The following table presents detailbusiness by closing the sale of our operations relatedremaining North American Coal business, which included Pinnacle mine in West Virginia and Oak Grove mine in Alabama. Pinnacle mine and Oak Grove mine were sold to Seneca and the deal structure was a sale of equity interests of our Sonoma operationsremaining coal business. Additionally, Seneca may pay us an earn-out of up to $50 million contingent upon the terms of a revenue sharing agreement which extends through the year 2020. However, we have not recorded a gain contingency in relation to this earn-out. We recorded the Statementsresults of Consolidated Operations:
|
| | | | | | | | | | | |
| | (In Millions) |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| REVENUES FROM PRODUCT SALES AND SERVICES | | | | | |
| Product | $ | — |
| | $ | — |
| | $ | 151.6 |
|
| | | | | | |
| GAIN ON SALE FROM DISCONTINUED OPERATIONS, net of tax | — |
| | — |
| | 38.0 |
|
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | — |
| | 2.0 |
| | (2.1 | ) |
| INCOME and GAIN ON SALE FROM DISCONTINUED OPERATIONS, net of tax | $ | — |
| | $ | 2.0 |
| | $ | 35.9 |
|
this sale within Income and Gain on SaleLoss from Discontinued Operations, net of tax duringfor the year ended December 31, 2013 relates2015.
|
| | | | | | | | | | | | |
| | | (In Millions) |
| | | Year Ended
December 31, |
| Loss from Discontinued Operations | | 2017 | | 2016 | | 2015 |
| Revenues from product sales and services | | $ | — |
| | $ | — |
| | $ | 392.9 |
|
| Cost of goods sold and operating expenses | | — |
| | — |
| | (449.2 | ) |
| Sales margin | | — |
| | — |
| | (56.3 | ) |
| Other operating income (expense) | | 0.5 |
| | (4.5 | ) | | (30.4 | ) |
| Gain on sale of coal mines | | 2.1 |
| | 2.1 |
| | 9.3 |
|
| Other expense | | — |
| | — |
| | (1.8 | ) |
| Gain (loss) from discontinued operations before income taxes | | 2.6 |
| | (2.4 | ) | | (79.2 | ) |
| Impairment of long-lived assets | | — |
| | — |
| | (73.4 | ) |
| Income tax benefit | | — |
| | — |
| | 0.2 |
|
| Gain (loss) from discontinued operations, net of tax | | $ | 2.6 |
| | $ | (2.4 | ) | | $ | (152.4 | ) |
Items Measured at Fair Value on a Non-Recurring Basis
The following table presents information about the impairment charge on non-financial assets that was measured on a fair value basis at March 31, 2015 for the North American Coal operations. There were no financial and non-financial assets and liabilities that were measured on a non-recurring fair value basis at December 31, 2017 and 2016 for the North American Coal operations. The table also indicates the fair value hierarchy of the valuation techniques used to additional income tax benefit resulting fromdetermine such fair value:
|
| | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | March 31, 2015 |
| Description | | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Total Losses |
| Assets: | | | | | | | | | | |
| Other long-lived assets - Property, plant and equipment and Mineral rights: North American Coal operating unit | | $ | — |
| | $ | — |
| | $ | 20.4 |
| | $ | 20.4 |
| | $ | 73.4 |
|
| | | $ | — |
| | $ | — |
| | $ | 20.4 |
| | $ | 20.4 |
| | $ | 73.4 |
|
In the actual tax gain fromfirst quarter of 2015, as part of the held for sale classification assigned to North American Coal, an impairment charge of Sonoma as included on$73.4 million was recorded. The impairment charge was to reduce the 2012 tax return,assets to their estimated fair value which was fileddetermined based on potential sales scenarios. We determined the fair value and recoverability of our North American Coal operating segment by comparing the estimated fair value of the underlying assets and liabilities to the estimated sales price of the operating segment held for sale. No further impairment was recorded in 2015.
Recorded Assets and Liabilities
|
| | | | | | | | |
| | | (In Millions) |
Assets and Liabilities of Discontinued Operations1 | | December 31,
2017 | | December 31,
2016 |
| Accrued liabilities | | $ | — |
| | $ | 1.1 |
|
| Other current liabilities | | 3.2 |
| | 4.9 |
|
| Total liabilities of discontinued operations | | $ | 3.2 |
| | $ | 6.0 |
|
| | | | | |
1 At December 31, 2017, we had no contingent liabilities associated with our exit from the coal business recorded on our parent company compared to $2.1 million at December 31, 2016. |
As part of the CLCC asset sale during the fourth quarter of 2014, there was an amount placed in escrow to cover decreases in working capital, indemnity obligations and regulatory liabilities. During the year ended December 31, 2013.2016, the final distribution of $10.3 million was released to us from escrow.
Income Taxes
We recorded a gain of $38.0 million,recognized no tax expense or benefit for the years ended December 31, 2017 and 2016 in Loss from Discontinued Operations, net of $8.1tax, related to our North American Coal investments. For the year ended December 31, 2015, we recognized a tax benefit of $0.2 million in Loss from Discontinued Operations, net of tax expense, related to a loss on our North American Coal investments.
Canadian Operations
Background
On January 27, 2015, we announced that the Bloom Lake Group commenced restructuring proceedings in Montreal, Quebec under the CCAA to address the Bloom Lake Group's immediate liquidity issues and to preserve and protect its assets for the benefit of all stakeholders while restructuring and/or sale options were explored. At that time, the Bloom Lake Group was no longer generating revenues and was not able to meet its obligations as they came due. As part of the CCAA process, the Court approved the appointment of a Monitor and certain other financial advisors.
Additionally, on May 20, 2015, the Wabush Group commenced restructuring proceedings in Montreal, Quebec under the CCAA. The Wabush Group was no longer generating revenues and was not able to meet its obligations as they came due. As a result of this action, the CCAA protection granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate the reorganization of each of their businesses and operations. The Monitor appointed by the court in the CCAA proceeding for the Bloom Lake Group has also been appointed by the court as the Monitor in the CCAA proceeding for the Wabush Group.
As a result of the commencement of CCAA proceedings for the Bloom Lake Group on January 27, 2015, we no longer have a controlling interest in the Bloom Lake Group. For that reason, we deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries effective January 27, 2015, which resulted in a pretax impairment loss on deconsolidation and other charges totaling $818.7 million that was recorded in the first quarter of 2015. The pretax loss on deconsolidation includes the derecognition of the carrying amounts of the Bloom Lake Group and certain other wholly-owned subsidiaries' assets, liabilities and accumulated other comprehensive losses and the recording of our remaining interests at fair value.
As a result of the commencement of CCAA proceedings for the Wabush Group on May 20, 2015, we deconsolidated certain Wabush Group wholly-owned subsidiaries effective May 20, 2015. The wholly-owned subsidiaries that were deconsolidated effective May 20, 2015 are Wabush Group entities that were not deconsolidated as part of the deconsolidation effective January 27, 2015 as discussed previously in this section. This deconsolidation, effective May 20, 2015, resulted in a pretax gain on deconsolidation and other charges, totaling $134.7 million. The pretax gain on deconsolidation includes the derecognition of the carrying amounts of these certain deconsolidated Wabush Group wholly-owned subsidiaries' assets, liabilities and accumulated other comprehensive losses and the adjustment of our remaining interests in the Canadian Entities to fair value.
Subsequent to each of the deconsolidations discussed above, we utilized the cost method to account for our investment in the Canadian Entities, which has been reflected as zero in our Statements of Consolidated Financial Position as of December 31, 2017 and 2016 based on the estimated fair value of the Canadian Entities' net assets. Loans to and accounts receivable from the Canadian Entities are recorded at an estimated fair value of $51.6 million and $48.6 million classified as IncomeLoans to and Gainaccounts receivables from the Canadian Entities in the Statements of
Consolidated Financial Position as of December 31, 2017 and 2016, respectively. The Loans to and accounts receivables from the Canadian Entities balance reflects our current estimate. We continue to update the estimate as the CCAA proceedings progress. The December 31, 2017 balance reflects developments since the January 27, 2015 and May 20, 2015 CCAA filings, including finalized liquidation values for completed asset sales and updates for the expected allocation of proceeds for those sales, updates for ongoing costs incurred by the various estates that will be held back from the final distribution to creditors of the Bloom Lake Group and the Wabush Group and the repayment of DIP financing.
Status of CCAA Proceedings
As of December 31, 2017, CCAA proceedings are ongoing and the majority of the assets of each of the Bloom Lake Group and the Wabush Group have been liquidated. The net proceeds of sale of the assets of the Bloom Lake Group and the Wabush Group are currently being held by the Monitor. Certain of these funds will be utilized to fund the accrued and ongoing costs of the CCAA proceedings. The Monitor has conducted a claims process pursuant to which creditors, including the Company and its affiliates, have filed claims against the Bloom Lake Group and the Wabush Group. The Monitor is reviewing all claims filed as part of this claims process. Currently, there is uncertainty as to the amount of the distribution that will be made to the creditors of the Bloom Lake Group and the Wabush Group, including, if any, to us, and whether we could be held liable for claims that may be asserted by or on Salebehalf of the Bloom Lake Group or the Wabush Group or by their respective representatives against non-debtor affiliates of the Bloom Lake Group and the Wabush Group.
During 2017, we became aware that it was probable the Monitor will assert a preference claim against us and/or certain of our affiliates. Given that it is probable the claim will be asserted by the Monitor, we have recorded an estimated liability of $55.6 million, which includes the value of our related-party claims against the Bloom Lake Group and the Wabush Group. Should the Monitor proceed to assert the claim, we believe the Monitor will demand an amount in excess of the value of our related-party claims against the Bloom Lake Group and the Wabush Group. Thus, it is possible that a change in the estimated liability may occur in the future. We deny liability for any amount and will vigorously defend such claim. Refer to the Guarantees and Contingent Liabilities section below for additional information.
During 2017, the Wabush Scully Mine was sold as part of the ongoing CCAA proceedings for the Wabush Group. As part of the sale, the environmental remediation obligations were conveyed to the buyer and we were released from our guarantees. Refer to the Guarantees and Contingent Liabilities section below for additional information.
Loss on Discontinued Operations
Our Canadian exit represents a strategic shift in our business. For this reason, our previously reported Eastern Canadian Iron Ore and Ferroalloys operating segment results for all periods prior to the respective deconsolidations, as well as costs to exit, are classified as discontinued operations.
|
| | | | | | | | | | | | |
| | | (In Millions) |
| | | Year Ended December 31, |
| Loss from Discontinued Operations | | 2017 | | 2016 | | 2015 |
| Revenues from product sales and services | | $ | — |
| | $ | — |
| | $ | 11.3 |
|
| Cost of goods sold and operating expenses | | — |
| | — |
| | (11.1 | ) |
| Sales margin | | — |
| | — |
| | 0.2 |
|
| Other operating expense | | — |
| | — |
| | (33.8 | ) |
| Other expense | | — |
| | — |
| | (1.0 | ) |
| Loss from discontinued operations before income taxes | | — |
| | — |
| | (34.6 | ) |
| Loss from deconsolidation | | (21.3 | ) | | (17.5 | ) | | (710.9 | ) |
| Income tax benefit | | — |
| | — |
| | 5.8 |
|
| Loss from discontinued operations, net of tax | | $ | (21.3 | ) | | $ | (17.5 | ) | | $ | (739.7 | ) |
Canadian Entities loss from deconsolidation totaled $21.3 million and $17.5 million for the year ended December 31, 2017 and 2016, respectively and included the following:
|
| | | | | | | | | | | | |
| | | (In Millions) |
| | | Year Ended December 31, | | Year Ended December 31, | | Year Ended
December 31, |
| | | 2017 | | 2016 | | 2015 |
Investment impairment on deconsolidation1 | | $ | 3.0 |
| | $ | (17.5 | ) | | $ | (507.8 | ) |
| Guarantees and contingent liabilities | | (24.3 | ) | | — |
| | (203.1 | ) |
| Total loss from deconsolidation | | $ | (21.3 | ) | | $ | (17.5 | ) | | $ | (710.9 | ) |
| | | | | | | |
1 Includes the adjustment to fair value of our remaining interest in the Canadian Entities. | | |
Investments in the Canadian Entities
We continue to indirectly own a majority of the interest in the Canadian Entities but have deconsolidated those entities because we no longer have a controlling interest as a result of the CCAA proceedings commenced with respect to the Bloom Lake Group and the Wabush Group. At the respective dates of deconsolidation, January 27, 2015 and May 20, 2015 and subsequently at each reporting period, we adjusted our investment in the Canadian Entities to fair value with a corresponding charge to Loss from Discontinued Operations, net of tax. As the estimated amount of the Canadian Entities' liabilities exceeded the estimated fair value of the assets available for distribution to their creditors, the fair value of our equity investment is approximately zero.
Amounts Receivable from the Canadian Entities
Prior to the deconsolidations, certain of our wholly-owned subsidiaries made loans to the Canadian Entities for the purpose of funding their operations and had accounts receivable generated in the ordinary course of business. The loans, corresponding interest and the accounts receivable were considered intercompany transactions and eliminated in our consolidated financial statements. Since the deconsolidations, the loans, associated interest and accounts receivable are considered related party transactions and have been recognized in our consolidated financial statements at their estimated fair value of $51.6 million and $48.6 million classified as Loans to and accounts receivables from the Canadian Entities in the Statements of Consolidated Financial Position at December 31, 2017 and 2016, respectively.
Pre-Petition Financing
Prior to the commencement of CCAA proceedings for the Wabush Group on May 20, 2015, a secured credit facility (the "Pre-Petition financing") was made available by Cliffs Mining Company to provide support to the Wabush Group for ongoing business activities. As of December 31, 2017 and 2016, the amount outstanding under the Pre-Petition financing was $7.2 million. Our estimated recovery of the Pre-Petition financing is included within the Loans to and accounts receivables from the Canadian Entities of $51.6 million. The Pre-Petition financing is secured by the proceeds of certain assets of the Wabush Group.
Guarantees and Contingent Liabilities
During 2017, we became aware that it was probable the Monitor will assert a preference claim against the Company and/or certain of its affiliates. Given that it is probable the claim will be asserted by the Monitor, we have recorded an estimated liability of $55.6 million, which includes the value of our related-party claims against the Bloom Lake Group and the Wabush Group, classified as Contingent claims in the Statements of Consolidated Financial Position as of December 31, 2017 and included within Loss from Discontinued Operations, net of tax in the Statements of Consolidated Operations for the year ended December 31, 20122017. Should the Monitor proceed to assert the claim, we believe the Monitor will demand an amount in excess of the value of our related-party claims against the Bloom Lake Group and the Wabush Group. Thus, it is possible that a change in the estimated liability may occur in the future. We deny liability for any amount and will vigorously defend such claim.
We previously recorded liabilities of $37.2 million related to guarantees for certain environmental obligations of the Canadian Entities, classified as Other liabilities in the Statements of Consolidated Financial Position as of December 31, 2016. During 2017, the Wabush Scully Mine was sold as part of the ongoing CCAA proceedings for the Wabush Group. As part of this transaction, we were required to fund the buyer's financial assurance shortfall of $7.7 million in order to complete the conveyance of the environmental remediation obligations to the buyer, which released us from our guarantees and resulted in a net gain of $31.4 million included in Loss from Discontinued Operations, net
of tax in the Statements of Consolidated Operations. Refer to the Items Measured at Fair Value on a Non-Recurring Basis section below for additional information.
Items Measured at Fair Value on a Non-Recurring Basis
The following table presents information about the financial assets and liabilities that were measured on a fair value basis at December 31, 2017 and 2016 for the Canadian Entities. The table also indicates the fair value hierarchy of the valuation techniques used to determine such fair value:
|
| | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | December 31, 2017 |
| Description | | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Gains |
| Assets: | | | | | | | | | | |
| Loans to and accounts receivables from the Canadian Entities | | $ | — |
| | $ | — |
| | $ | 51.6 |
| | $ | 51.6 |
| | $ | 3.0 |
|
| Liabilities: | | | | | | | | | | |
| Guarantees and contingent liabilities | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 31.4 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | December 31, 2016 |
| Description | | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Losses |
| Assets: | | | | | | | | | | |
| Loans to and accounts receivables from the Canadian Entities | | $ | — |
| | $ | — |
| | $ | 48.6 |
| | $ | 48.6 |
| | $ | 17.5 |
|
| Liabilities: | | | | | | | | | | |
| Guarantees and contingent liabilities | | $ | — |
| | $ | — |
| | $ | 37.2 |
| | $ | 37.2 |
| | $ | — |
|
To assess the fair value and recoverability of the accounts receivable from the Canadian Entities, we estimated the fair value of the underlying net assets of the Canadian Entities available for distribution to their creditors in relation to the estimated creditor claims and the priority of those claims. These underlying amounts are denominated primarily in Canadian dollars and are remeasured on a quarterly basis.
We determined the fair value and recoverability of our Canadian investments by comparing the estimated fair value of the remaining underlying assets of the Canadian Entities to remaining estimated liabilities. We recorded the Canadian denominated guarantees at book value, which best approximated fair value.
Our estimates involve significant judgment and are based on currently available information, an assessment of the validity of certain claims and estimated payments made by the Canadian Entities. Our ultimate recovery is subject to the final liquidation value of the Canadian Entities. Further, the final liquidation value and ultimate recovery of the creditors of the Canadian Entities, including, if any, to Cliffs and various subsidiaries, may impact our estimates of contingent liability exposure described previously.
Income Taxes
We have recognized no tax expense or benefit for the years ended December 31, 2017 and 2016 in Loss from Discontinued Operations, net of tax, related to our saleCanadian investments. For the year ended December 31, 2015, we recognized a tax benefit of the Sonoma operations, which was completed as of November 12, 2012. We recorded a loss$5.8 million in Loss from discontinued operations in 2012 of $2.1 million,Discontinued Operations, net of $2.4 million in tax expense.tax.
NOTE 15 - CAPITAL STOCK
DepositaryCommon Share Public Offering
On February 9, 2017, we issued 63.25 million common shares in an underwritten public offering at a public offering price of $10.75 per common share. We received net proceeds of $661.3 million. The net proceeds from the issuance of our common shares and our issuance of $500 million aggregate principal amount of 5.75% 2025 Senior Notes were used to redeem in full all of our outstanding 8.00% 2020 1.5 Lien Notes and 7.75% 2020 Second Lien Notes. The aggregate principal amount outstanding of debt redeemed was $648.6 million. Additionally, through tender offers, we purchased $422.2 million in aggregate principal amount of debt, excluding unamortized discounts and deferred charges, of our 5.90% 2020 Senior Notes, our 4.80% 2020 Senior Notes and our 4.875% 2021 Senior Notes. In addition, we redeemed $35.6 million aggregate principal amount of the 8.25% 2020 First Lien Notes with the remaining net proceeds from our common share offering.
On August 10, 2016, we issued 44.4 million common shares in an underwritten public offering at a public offering price of $6.75 per common share. We received net proceeds of $287.6 million. The net proceeds from the issuance of our common shares were used to fully redeem our 3.95% 2018 Senior Notes.
Preferred Shares Conversion to Common Shares
On February 21, 2013,January 4, 2016, we issued 29.25 million depositary shares, representing an aggregateannounced that our Board of 731,250 preferred shares, comprisedDirectors determined the final quarterly dividend of our Preferred Shares would not be paid in cash, but instead, pursuant to the terms of the 27.0 millionPreferred Shares, the conversion rate was increased such that holders of the Preferred Shares received additional common shares in lieu of the accrued dividend at the time of the mandatory conversion on February 1, 2016. The number of common shares in the aggregate that were issued in lieu of the final dividend was 1.3 million. This resulted in an effective conversion rate of 0.9052 common shares, rather than 0.8621 common shares, per depositary share, offering and the exercise of an underwriters' over-allotment option to purchase an additional 2.25 million depositary shares. Each depositary share representseach representing a 1/40th interest inof a share of our 7.00 percent Series A Mandatory Convertible Preferred Stock, Class A, without par value ("Preferred Share") at a price of $25 per depositary share for total net proceeds of approximately $709.4 million, after underwriter fees and discounts. Each Preferred Share has an initial liquidation preference of $1,000 per share (equivalentShare.
Prior to a $25 liquidation preference per depositary share). When and if declared by our Board of Directors, we will pay cumulative dividends on each Preferred Share at an annual rate of 7.00 percent on the liquidation preference. We will pay declared dividends in cash on February 1, May 1, August 1 and November 1 of each year, commencing on May 1, 2013 and to, and including February 1, 2016. Holdersmandatory conversion, holders of the depositary shares arewere entitled to a proportional fractional interest in the rights and preferences of the Preferred Shares,Series A preferred shares, including conversion, dividend, liquidation and voting rights, subject to the provisions of the deposit agreement.
The Preferred Shares may be converted,Series A preferred shares were convertible, at the option of the holder, at the minimum conversion rate of 28.1480 of our common shares (equivalent to 0.7037 of our common shares per depositary share) at any time prior to February 1, 2016 or other than during a fundamental change conversion period, subject to anti-dilution adjustments. If not converted prior to that time, each Preferred Share will convertSeries A preferred share converted automatically on February 1, 2016 into between 28.1480 and 34.4840 common shares, par value $0.125 per share, subject to anti-dilution adjustments. The number of common shares issuableissued on conversion will bewas determined based on the average VWAP per share of our common shares during the 20 trading day period beginning on, and including, the 23rd scheduled trading day prior to February 1, 2016, subject to customary anti-dilution adjustments. Upon conversion a minimumon February 1, 2016, an aggregate of 20.626.5 million common shares and a maximum ofwere issued, representing 25.2 million common shares will be issued.
If certain fundamental changes involving the Company occur, holdersissuable upon conversion and 1.3 million that were issued in lieu of the Preferred Shares may convert their shares into a number of common shares at the conversion rate that will be adjusted under certain circumstances, and such holders also will be entitled to a fundamental change dividend make-whole amount. The Preferred Shares are not redeemable.
Common Share Public Offering
On February 21, 2013, we issued 10.35 million common shares, comprised of the 9.0 million common share offering and the exercise of an underwriters' option to purchase an additional 1.35 million common shares. We received net proceeds of approximately $285.3 million at a closing price of $29.00 per common share.final cash dividend.
Dividends
On March 20, 2013, our Board of Directors declared a cash dividend of $13.6111 per Preferred Share, which is equivalent to approximately $0.34 per depositary share. The cash dividend was paid on May 1, 2013 to our shareholders of record as of the close of business on April 15, 2013. On May 7, 2013, September 9, 2013, and November 11, 2013, our Board of Directors declared a quarterly cash dividend of $17.50 per Preferred Share, which is equivalent to approximately $0.44 per depositary share. The cash dividend was paid on August 1, 2013, November 1, 2013 and February 3, 2014 to our shareholders of record as of the close of business on July 15, 2013, October 15, 2013 and January 15, 2014, respectively. On February 11, 2014, May 13, 2014, and September 8, 2014, our board of directors declared the quarterly cash dividend of $17.50 per Preferred Share, which is equivalent to approximately $0.44 per depositary share. The cash dividend was paid on May 1, 2014, August 1, 2014 and November 3, 2014, to our Preferred Shareholders of record as of the close of business on April 15, 2014, July 15, 2014, and October 15, 2014, respectively. On November 19, 2014, March 27, 2015, July 1, 2015 and September 10, 2015, our Board of Directors declared the quarterly cash dividend of $17.50 per Preferred Share, which is equivalent to approximately $0.44 per depositary share. The cash dividend of $12.8 million was paid on February 2, 2015, May 1, 2015, August 3, 2015 and November 2, 2015 to our shareholders of record as of the close of business on January 15, 2015.2015, April 15, 2015, July 15, 2015 and October 15, 2015, respectively.
On February 11, 2013,Debt-for-Equity Exchanges
During the year ended December 31, 2016, we entered into a series of privately negotiated exchange agreements whereby we issued an aggregate of 8.2 million common shares in exchange for $10.0 million aggregate principal amount of our Board3.95% 2018 Senior Notes, $20.1 million aggregate principal amount of Directors approvedour 4.80% 2020 Senior Notes and $26.8 million aggregate principal amount of our 4.875% 2021 Senior Notes. There were no exchanges that represented more than 1% of our outstanding common shares during any quarter. Accordingly, we recognized a reduction to our quarterly cash dividend rate by 76 percent to $0.15 per share. Our Boardgain of Directors took this step$11.3 million in order to improve the future cash flows available for investmentGain (loss) on extinguishment/restructuring of debt in the Phase II expansion at Bloom Lake, as well as to preserve our investment-grade credit ratings.Statements of Consolidated Operations for the year ended December 31, 2016. The decreased dividend of $0.15 per share was paid on March 1, 2013, June 3, 2013, September 3, 2013 and December 2, 2013 to our common shareholders of record asissuances of the closecommon shares in exchange for our senior notes due 2018, 2020 and 2021 were made in reliance on the exemption from registration provided in Section 3(a)(9) of business on February 22, 2013, May 17, 2013, August 15, 2013 and November 22, 2013, respectively. Additionally, the cash dividend of $0.15 per share was paid on March 3, 2014, June 3, 2014, September 2, 2014 and December 1, 2014 to our common shareholders of record as of close of business on February 21, 2014, May 23, 2014, August 15, 2014 and November 15, 2014.Securities Act.
NOTE 16 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of Accumulated other comprehensive income (loss)loss within Cliffs shareholders’ equitydeficit and related tax effects allocated to each are shown below as of December 31, 2014, 20132017, 2016 and 2012:2015:
| | | | (In Millions) | (In Millions) |
| | Pre-tax Amount | | Tax Benefit (Provision) | | After-tax Amount | Pre-tax Amount | | Tax Benefit | | After-tax Amount |
| As of December 31, 2012: | | | | | | |
| As of December 31, 2017: | | | | | | |
| Postretirement benefit liability | | $ | (387.3 | ) | | $ | 123.4 |
| | $ | (263.9 | ) |
| Foreign currency translation adjustments | | 225.4 |
| | — |
| | 225.4 |
|
| Unrealized net loss on derivative financial instruments | | (0.5 | ) | | — |
| | (0.5 | ) |
| | | $ | (162.4 | ) | | $ | 123.4 |
| | $ | (39.0 | ) |
| As of December 31, 2016: | | | | | | |
| Postretirement benefit liability | | $ | (384.0 | ) | | $ | 123.4 |
| | $ | (260.6 | ) |
| Foreign currency translation adjustments | | 239.3 |
| | — |
| | 239.3 |
|
| | | $ | (144.7 | ) | | $ | 123.4 |
| | $ | (21.3 | ) |
| As of December 31, 2015: | | | | | | |
| Postretirement benefit liability | $ | (576.7 | ) | | $ | 194.0 |
| | $ | (382.7 | ) | $ | (364.8 | ) | | $ | 123.4 |
| | $ | (241.4 | ) |
| Foreign currency translation adjustments | 316.3 |
| | — |
| | 316.3 |
| 220.7 |
| | — |
| | 220.7 |
|
| Unrealized net gain on derivative financial instruments | 12.4 |
| | (3.7 | ) | | 8.7 |
| 2.2 |
| | 0.4 |
| | 2.6 |
|
| Unrealized gain on securities | 3.3 |
| | (1.2 | ) | | 2.1 |
| 0.1 |
| | — |
| | 0.1 |
|
| | $ | (244.7 | ) | | $ | 189.1 |
| | $ | (55.6 | ) | $ | (141.8 | ) | | $ | 123.8 |
| | $ | (18.0 | ) |
| As of December 31, 2013: | | | | | | |
| Postretirement benefit liability | $ | (299.3 | ) | | $ | 94.4 |
| | $ | (204.9 | ) | |
| Foreign currency translation adjustments | 106.7 |
| | — |
| | 106.7 |
| |
| Unrealized net gain on derivative financial instruments | (30.0 | ) | | 9.1 |
| | (20.9 | ) | |
| Unrealized gain on securities | 9.3 |
| | (3.1 | ) | | 6.2 |
| |
| | $ | (213.3 | ) | | $ | 100.4 |
| | $ | (112.9 | ) | |
| As of December 31, 2014: | | | | | | |
| Postretirement benefit liability | $ | (425.3 | ) | | $ | 134.2 |
| | $ | (291.1 | ) | |
| Foreign currency translation adjustments | 64.4 |
| | — |
| | 64.4 |
| |
| Unrealized net loss on derivative financial instruments | (25.9 | ) | | 7.8 |
| | (18.1 | ) | |
| Unrealized gain on securities | (1.3 | ) | | 0.3 |
| | (1.0 | ) | |
| | $ | (388.1 | ) | | $ | 142.3 |
| | $ | (245.8 | ) | |
The following tables reflect the changes in Accumulated other comprehensive income (loss)loss related to Cliffs shareholders’ equity for December 31, 2014, 20132017, 2016 and 2012:2015:
|
| | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| | Postretirement Benefit Liability, net of tax | | Unrealized Net Gain (Loss) on Securities, net of tax | | Unrealized Net Gain (Loss) on Foreign Currency Translation | | Net Unrealized Gain (Loss) on Derivative Financial Instruments, net of tax | | Accumulated Other Comprehensive Income (Loss) |
| Balance December 31, 2013 | $ | (204.9 | ) | | $ | 6.2 |
| | $ | 106.7 |
| | $ | (20.9 | ) | | $ | (112.9 | ) |
| Other comprehensive income (loss) before reclassifications | (0.4 | ) | | 3.8 |
| | 40.5 |
| | (2.3 | ) | | 41.6 |
|
| Net loss (gain) reclassified from accumulated other comprehensive income (loss) | 3.3 |
| | 0.1 |
| | — |
| | 12.8 |
| | 16.2 |
|
| Balance March 31, 2014 | $ | (202.0 | ) | | $ | 10.1 |
| | $ | 147.2 |
| | $ | (10.4 | ) | | $ | (55.1 | ) |
| Other comprehensive loss before reclassifications | (1.4 | ) | | (2.4 | ) | | 19.7 |
| | 9.7 |
| | 25.6 |
|
| Net loss (gain) reclassified from accumulated other comprehensive income (loss) | 4.0 |
| | (1.3 | ) | | — |
| | 6.6 |
| | 9.3 |
|
| Balance June 30, 2014 | $ | (199.4 | ) | | $ | 6.4 |
| | $ | 166.9 |
| | $ | 5.9 |
| | $ | (20.2 | ) |
| Other comprehensive income (loss) before reclassifications | 3.5 |
| | 1.3 |
| | (65.9 | ) | | (20.0 | ) | | (81.1 | ) |
| Net loss (gain) reclassified from accumulated other comprehensive income (loss) | 7.6 |
| | (7.1 | ) | | — |
| | (0.6 | ) | | (0.1 | ) |
| Balance September 30, 2014 | $ | (188.3 | ) | | $ | 0.6 |
| | $ | 101.0 |
| | $ | (14.7 | ) | | $ | (101.4 | ) |
| Other comprehensive income (loss) before reclassifications | $ | (98.7 | ) | | $ | (1.4 | ) | | $ | (36.6 | ) | | $ | (15.6 | ) | | $ | (152.3 | ) |
| Net loss (gain) reclassified from accumulated other comprehensive income (loss) | $ | (4.1 | ) | | $ | (0.2 | ) | | $ | — |
| | $ | 12.2 |
| | $ | 7.9 |
|
| Balance December 31, 2014 | $ | (291.1 | ) | | $ | (1.0 | ) | | $ | 64.4 |
| | $ | (18.1 | ) | | $ | (245.8 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| | Postretirement Benefit Liability, net of tax | | Unrealized Net Gain (Loss) on Securities, net of tax | | Unrealized Net Gain (Loss) on Foreign Currency Translation | | Net Unrealized Gain (Loss) on Derivative Financial Instruments, net of tax | | Accumulated Other Comprehensive Income (Loss) |
| Balance December 31, 2012 | $ | (382.7 | ) | | $ | 2.1 |
| | $ | 316.3 |
| | $ | 8.7 |
| | $ | (55.6 | ) |
| Other comprehensive income (loss) before reclassifications | (1.1 | ) | | 2.5 |
| | 3.3 |
| | (5.0 | ) | | (0.3 | ) |
| Net loss (gain) reclassified from accumulated other comprehensive income (loss) | 6.4 |
| | 0.1 |
| | — |
| | (2.0 | ) | | 4.5 |
|
| Balance March 31, 2013 | $ | (377.4 | ) | | $ | 4.7 |
| | $ | 319.6 |
| | $ | 1.7 |
| | $ | (51.4 | ) |
| Other comprehensive loss before reclassifications | (1.5 | ) | | (2.0 | ) | | (152.0 | ) | | (42.2 | ) | | (197.7 | ) |
| Net loss (gain) reclassified from accumulated other comprehensive income (loss) | 8.1 |
| | 3.6 |
| | — |
| | (2.2 | ) | | 9.5 |
|
| Balance June 30, 2013 | $ | (370.8 | ) | | $ | 6.3 |
| | $ | 167.6 |
| | $ | (42.7 | ) | | $ | (239.6 | ) |
| Other comprehensive income (loss) before reclassifications | (0.6 | ) | | 3.5 |
| | 22.8 |
| | 12.1 |
| | 37.8 |
|
| Net loss (gain) reclassified from accumulated other comprehensive income (loss) | 6.3 |
| | 0.9 |
| | — |
| | 16.2 |
| | 23.4 |
|
| Balance September 30, 2013 | $ | (365.1 | ) | | $ | 10.7 |
| | $ | 190.4 |
| | $ | (14.4 | ) | | $ | (178.4 | ) |
| Other comprehensive income (loss) before reclassifications | $ | 154.5 |
| | $ | (4.9 | ) | | $ | (83.7 | ) | | $ | (16.6 | ) | | $ | 49.3 |
|
| Net loss (gain) reclassified from accumulated other comprehensive income (loss) | $ | 5.7 |
| | $ | 0.4 |
| | $ | — |
| | $ | 10.1 |
| | $ | 16.2 |
|
| Balance December 31, 2013 | $ | (204.9 | ) | | $ | 6.2 |
| | $ | 106.7 |
| | $ | (20.9 | ) | | $ | (112.9 | ) |
|
| | | | | | | | | | | | | | | |
| | (In Millions) |
| | Postretirement Benefit Liability, net of tax | | Unrealized Net Gain (Loss) on Foreign Currency Translation | | Net Unrealized Loss on Derivative Financial Instruments, net of tax | | Accumulated Other Comprehensive Income (Loss) |
| Balance December 31, 2016 | $ | (260.6 | ) | | $ | 239.3 |
| | $ | — |
| | $ | (21.3 | ) |
| Other comprehensive loss before reclassifications | (29.8 | ) | | (13.9 | ) | | (0.5 | ) | | (44.2 | ) |
| Net loss reclassified from accumulated other comprehensive income (loss) | 26.5 |
| | — |
| | — |
| | 26.5 |
|
| Balance December 31, 2017 | $ | (263.9 | ) | | $ | 225.4 |
| | $ | (0.5 | ) | | $ | (39.0 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| | Postretirement Benefit Liability, net of tax | | Unrealized Net Gain (Loss) on Securities, net of tax | | Unrealized Net Gain on Foreign Currency Translation | | Net Unrealized Gain on Derivative Financial Instruments, net of tax | | Accumulated Other Comprehensive Income (Loss) |
| Balance December 31, 2011 | $ | (408.9 | ) | | $ | 2.6 |
| | $ | 312.5 |
| | $ | 1.2 |
| | $ | (92.6 | ) |
| Change during 2012 | 26.2 |
| | (0.5 | ) | | 3.8 |
| | 7.5 |
| | 37.0 |
|
| Balance December 31, 2012 | $ | (382.7 | ) | | $ | 2.1 |
| | $ | 316.3 |
| | $ | 8.7 |
| | $ | (55.6 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| | Postretirement Benefit Liability, net of tax | | Unrealized Net Gain (Loss) on Securities, net of tax | | Unrealized Net Gain on Foreign Currency Translation | | Net Unrealized Gain (Loss) on Derivative Financial Instruments, net of tax | | Accumulated Other Comprehensive Income (Loss) |
| Balance December 31, 2015 | $ | (241.4 | ) | | $ | 0.1 |
| | $ | 220.7 |
| | $ | 2.6 |
| | $ | (18.0 | ) |
| Other comprehensive income (loss) before reclassifications | (44.8 | ) | | (0.1 | ) | | 18.4 |
| | (3.3 | ) | | (29.8 | ) |
| Net loss reclassified from accumulated other comprehensive income (loss) | 25.6 |
| | — |
| | 0.2 |
| | 0.7 |
| | 26.5 |
|
| Balance December 31, 2016 | $ | (260.6 | ) | | $ | — |
| | $ | 239.3 |
| | $ | — |
| | $ | (21.3 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| | Postretirement Benefit Liability, net of tax | | Unrealized Net Gain (Loss) on Securities, net of tax | | Unrealized Net Gain (Loss) on Foreign Currency Translation | | Net Unrealized Gain (Loss) on Derivative Financial Instruments, net of tax | | Accumulated Other Comprehensive Income (Loss) |
| Balance December 31, 2014 | $ | (291.1 | ) | | $ | (1.0 | ) | | $ | 64.4 |
| | $ | (18.1 | ) | | $ | (245.8 | ) |
| Other comprehensive income (loss) before reclassifications | 9.1 |
| | 5.4 |
| | (26.4 | ) | | 1.9 |
| | (10.0 | ) |
| Net loss (gain) reclassified from accumulated other comprehensive income (loss) | 40.6 |
| | (4.3 | ) | | 182.7 |
| | 18.8 |
| | 237.8 |
|
| Balance December 31, 2015 | $ | (241.4 | ) | | $ | 0.1 |
| | $ | 220.7 |
| | $ | 2.6 |
| | $ | (18.0 | ) |
The following table reflects the details about Accumulated other comprehensive income (loss)loss components related to Cliffs shareholders’ equity for the yearyears ended December 31, 2014:2017, 2016 and 2015:
|
| | | | | | | | | | |
| | | (In Millions) | | |
| Details about Accumulated Other Comprehensive Income (Loss) Components | | Amount of (Gain)/Loss Reclassified into Income | | Affected Line Item in the Statement of Unaudited Condensed Consolidated Operations |
| | | Year Ended
December 31, 2014 | | Year Ended December 31, 2013 | | |
| Amortization of Pension and Postretirement Benefit Liability: | | | | | | |
| Prior service costs | | $ | (0.9 | ) | | $ | (0.6 | ) | | (1) |
| Net actuarial loss | | 19.1 |
| | 41.4 |
| | (1) |
| Curtailments/Settlements | | (5.0 | ) | | — |
| | (1) |
| Special termination benefits | | 3.4 |
| | — |
| | (1) |
| | | 16.6 |
| | 40.8 |
| | Total before taxes |
| | | (5.8 | ) | | (14.3 | ) | | Income tax benefit (expense) |
| | | $ | 10.8 |
| | $ | 26.5 |
| | Net of taxes |
| | | | | | | |
| Unrealized gain (loss) on marketable securities: | | | | | | |
| Sale of marketable securities | | $ | (11.4 | ) | | $ | (0.2 | ) | | Other non-operating income (expense) |
| Impairment | | (0.5 | ) | | 5.3 |
| | Other non-operating income (expense) |
| | | (11.9 | ) | | 5.1 |
| | Total before taxes |
| | | 3.4 |
| | (0.1 | ) | | Income tax benefit (expense) |
| | | $ | (8.5 | ) | | $ | 5.0 |
| | Net of taxes |
| | | | | | | |
| Unrealized gain (loss) on derivative financial instruments: | | | | | | |
| Australian dollar foreign exchange contracts | | $ | 18.9 |
| | $ | 17.0 |
| | Product revenues |
| Canadian dollar foreign exchange contracts | | 26.7 |
| | 15.3 |
| | Cost of goods sold and operating expenses |
| | | 45.6 |
| | 32.3 |
| | Total before taxes |
| | | (14.6 | ) | | (10.2 | ) | | Income tax benefit (expense) |
| | | $ | 31.0 |
| | $ | 22.1 |
| | Net of taxes |
| | | | | | | |
| Total Reclassifications for the Period | | $ | 33.3 |
| | $ | 53.6 |
| | |
|
| | | | | | | | | | | | | | |
| | | (In Millions) | | |
| Details about Accumulated Other Comprehensive Income (Loss) Components | | Amount of (Gain)/Loss Reclassified into Income | | Affected Line Item in the Statement of Consolidated Operations |
| | | Year Ended
December 31, 2017 | | Year Ended
December 31, 2016 | | Year Ended December 31, 2015 | | |
| Amortization of Pension and Postretirement Benefit Liability: | | | | | | | | |
Prior service costs1 | | $ | (0.4 | ) | | $ | (1.5 | ) | | $ | (1.4 | ) | | |
Net actuarial loss1 | | 26.9 |
| | 27.1 |
| | 27.4 |
| | |
Curtailments/Settlements1 | | — |
| | — |
| | 0.2 |
| | |
Effect of deconsolidation2 | | — |
| | — |
| | 15.1 |
| | Loss from Discontinued Operations, net of tax |
| | | 26.5 |
| | 25.6 |
| | 41.3 |
| | Total before taxes |
| | | — |
| | — |
| | (0.7 | ) | | Income tax benefit (expense) |
| | | $ | 26.5 |
| | $ | 25.6 |
| | $ | 40.6 |
| | Net of taxes |
| | | | | | | | | |
| Unrealized loss on marketable securities: | | | | | | | | |
| Sale of marketable securities | | $ | — |
| | $ | — |
| | $ | (2.6 | ) | | Other non-operating income (expense) |
| Impairment | | — |
| | — |
| | (2.0 | ) | | Other non-operating income (expense) |
| | | — |
| | — |
| | (4.6 | ) | | Total before taxes |
| | | — |
| | — |
| | 0.3 |
| | Income tax benefit (expense) |
| | | $ | — |
| | $ | — |
| | $ | (4.3 | ) | | Net of taxes |
| | | | | | | | | |
| Unrealized gain on foreign currency translation: | | | | | | | | |
| Dissolution of entity | | $ | — |
| | $ | 0.2 |
| | $ | — |
| | Other non-operating income (expense) |
Effect of deconsolidation3 | | — |
| | — |
| | 182.7 |
| | Loss from Discontinued Operations, net of tax |
| | | $ | — |
| | $ | 0.2 |
| | $ | 182.7 |
| | Net of taxes |
| | | | | | | | | |
| Unrealized gain on derivative financial instruments: | | | | | | | | |
| Treasury lock | | $ | — |
| | $ | 1.2 |
| | $ | — |
| | Gain (loss) on extinguishment/restructuring of debt |
| Australian dollar foreign exchange contracts | | — |
| | — |
| | 26.9 |
| | Product revenues |
| | | — |
| | 1.2 |
| | 26.9 |
| | Total before taxes |
| | | — |
| | (0.5 | ) | | (8.1 | ) | | Income tax benefit (expense) |
| | | $ | — |
| | $ | 0.7 |
| | $ | 18.8 |
| | Net of taxes |
| | | | | | | | | |
| Total Reclassifications for the Period | | $ | 26.5 |
| | $ | 26.5 |
| | $ | 237.8 |
| | |
| | | | | | | | | |
1 These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. See NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information. |
2 Represents Canadian postretirement benefit liabilities that were deconsolidated. See NOTE 14 - DISCONTINUED OPERATIONS for further information. |
3 Represents Canadian accumulated currency translation adjustments that were deconsolidated. See NOTE 14 - DISCONTINUED OPERATIONS for further information. |
| |
(1) | These accumulated other comprehensive income components are included in the net periodic benefit cost recognized for the year ended December 31, 2014 and 2013. See NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
|
NOTE 17 - CASH FLOW INFORMATION
A reconciliation of capital additions to cash paid for capital expenditures for the years ended December 31, 2014, 20132017, 2016 and 20122015 is as follows:
| | | | (In Millions) | (In Millions) |
| | Year Ended December 31, | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Capital additions | $ | 235.5 |
| | $ | 752.3 |
| | $ | 1,335.3 |
| |
| Cash paid for capital expenditures | 284.1 |
| | 861.6 |
| | 1,127.5 |
| |
| Difference | $ | (48.6 | ) | | $ | (109.3 | ) | | $ | 207.8 |
| |
Capital additions1 | | $ | 156.0 |
| | $ | 68.5 |
| | $ | 96.7 |
|
| Less: | | | | | | |
| Non-cash accruals | $ | (58.5 | ) | | $ | (109.3 | ) | | $ | 152.5 |
| $ | (2.2 | ) | | $ | (0.6 | ) | | $ | 14.4 |
|
| Capital leases | 9.9 |
| | — |
| | 55.3 |
| 6.5 |
| | — |
| | 1.5 |
|
| Total | $ | (48.6 | ) | | $ | (109.3 | ) | | $ | 207.8 |
| |
| Cash paid for capital expenditures | | $ | 151.7 |
| | $ | 69.1 |
| | $ | 80.8 |
|
| | | | | | | |
1 Includes capital additions of $72.2 million and $24.5 million related to continuing operations and discontinued operations, respectively, for the year ended December 31, 2015. | | 1 Includes capital additions of $72.2 million and $24.5 million related to continuing operations and discontinued operations, respectively, for the year ended December 31, 2015. |
Cash payments for interest and income taxes in 2014, 20132017, 2016 and 20122015 are as follows:
|
| | | | | | | | | | | |
| | (In Millions) |
| 2014 | | 2013 | | 2012 |
| Taxes paid on income | $ | 47.3 |
| | $ | 153.3 |
| | $ | 443.2 |
|
| Interest paid on debt obligations | 176.5 |
| | 174.4 |
| | 207.5 |
|
|
| | | | | | | | | | | |
| | (In Millions) |
| 2017 | | 2016 | | 2015 |
| Taxes paid on income | $ | 1.7 |
| | $ | 6.0 |
| | $ | 5.0 |
|
| Income tax refunds | $ | (7.8 | ) | | $ | (5.4 | ) | | $ | (211.4 | ) |
Interest paid on debt obligations1 | $ | 139.0 |
| | $ | 184.0 |
| | $ | 185.6 |
|
| | | | | | |
1 Includes interest paid on the corporate guarantees of the equipment loans that relate to discontinued operations for the years ended December 31, 2016 and 2015 of $1.4 million and $4.8 million, respectively. |
Non-Cash Financing Activities - Declared Dividends
On November 19, 2014, our Board of Directors declared the quarterly cash dividend on our Preferred Shares of $17.50 per share, which is equivalent to approximately $0.44 per depositary share, each representing 1/40th of a Preferred Share. The cash dividend of $12.8 million was paid on February 2, 2015 to our preferred shareholders of record as of the close of business on January 15, 2015.
NOTE 18 - RELATED PARTIES
ThreeOne of our fivefour operating U.S. iron ore mines and one of our two Eastern Canadian iron ore mines are owned with variousis a co-owned joint venture partnerswith companies that are integrated steel producers or their subsidiaries. We are the manager of each of the mines we co-ownsuch co-owned mine and rely on our joint venture partners to make their required capital contributions and to pay for their share of the iron ore pellets and concentrate that we produce. TheOur joint venture partners are also our customers. The following is a summary of the mine ownership of thesethe co-owned iron ore minesmine at December 31, 2014:2017:
|
| | | | | | | | | | | | |
| Mine | | Cliffs Natural Resources | | ArcelorMittal | | U.S. Steel Canada | | WISCO |
| Empire | | 79.0 | % | | 21.0 | % | | — |
| | — |
|
| Tilden | | 85.0 | % | | — |
| | 15.0 | % | | — |
|
| Hibbing | | 23.0 | % | | 62.3 | % | | 14.7 | % | | — |
|
| Bloom Lake | | 82.8 | % | | — |
| | — |
| | 17.2 | % |
|
| | | | | | | | | |
| Mine | | Cleveland-Cliffs Inc. | | ArcelorMittal | | U.S. Steel |
| Hibbing | | 23.0 | % | | 62.3 | % | | 14.7 | % |
During 2017, our ownership interest in Empire increased to 100% as we reached an agreement to distribute the noncontrolling interest net assets of $132.7 million to ArcelorMittal, has a unilateral right to putin exchange for its interest in Empire. The net assets were agreed to be distributed in three installments of $44.2 million each, the first of which was paid upon the execution of the agreement and the remaining distributions are due in August 2018 and August 2019. The remaining two outstanding installments are reflected in Partnership distribution payable and Other liabilities in the Statements of Consolidated Financial Position as of December 31, 2017. We accounted for the increase in ownership as an equity transaction, which resulted in a $12.1 million decrease in equity attributable to Cliffs' shareholders and a $116.7 million decrease in Noncontrolling interest.
As part of a 2014 extension agreement between us and ArcelorMittal, which amended certain terms of the Empire minepartnership agreement, distributions of the partners' equity amounts were required to us, but has not exercisedbe made on a quarterly basis beginning in the first quarter of 2015. These equity distributions were made through the termination of the partnership agreement on December 31, 2016. We paid $8.7 million in January 2017 related to 2016 distributions. During the year ended December 31, 2016, we recorded distributions of $57.5 million to ArcelorMittal under this rightagreement, of which $48.8 million was paid as of December 31, 2016. During the year ended December 31, 2015, we recorded distributions
of $51.7 million under this agreement, of which $40.6 million was paid as of December 31, 2015 and $11.1 million was paid in January 2016.
During 2017, we also acquired the remaining 15% equity interest in Tilden for $105.0 million. With the closing of this transaction, we now have 100% ownership of the mine. We accounted for the increase in ownership as an equity transaction, which resulted in an $89.1 million decrease in equity attributable to date.Cliffs' shareholders and a $15.9 million decrease in Noncontrolling interest.
Product revenues from related parties were as follows:
| | | | (In Millions) | (In Millions) |
| | Year Ended December 31, | Year Ended
December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Product revenues from related parties | $ | 1,378.7 |
| | $ | 1,664.8 |
| | $ | 1,660.8 |
| $ | 806.7 |
| | $ | 830.1 |
| | $ | 671.1 |
|
| Total product revenues | 4,230.8 |
| | 5,346.6 |
| | 5,520.9 |
| 2,089.2 |
| | 1,913.5 |
| | 1,832.4 |
|
| Related party product revenue as a percent of total product revenue | 32.6 | % | | 31.1 | % | | 30.1 | % | 38.6 | % | | 43.4 | % | | 36.6 | % |
Amounts due fromThe following table presents the classification of related parties recordedparty assets and liabilities in Accounts receivable, net and Other current assets, including customer supply agreements and provisional pricing arrangements, were $151.1 million and $132.0 million atthe Statements of Consolidated Financial Position as of December 31, 20142017 and 2013, respectively. Amounts due to related parties recorded in Other current liabilities, including provisional pricing arrangements and liabilities to related parties, were $13.6 million and $25.1 million at December 31, 2014 and 2013, respectively.2016:
|
| | | | | | | | | |
| | (In Millions) |
| | Balance Sheet Location | | December 31, 2017 | | December 31, 2016 |
| Amounts due from related parties | Accounts receivable, net | | $ | 68.1 |
| | $ | 46.9 |
|
| Customer supply agreements and provisional pricing agreements | Derivative assets | | 37.9 |
| | 26.8 |
|
| Amounts due to related parties | Partnership distribution payable | | (44.2 | ) | | (8.7 | ) |
| Amounts due to related parties | Other current liabilities | | (12.3 | ) | | — |
|
| Amounts due to related parties | Other liabilities | | (41.4 | ) | | — |
|
| Net amounts due from related parties | | | $ | 8.1 |
| | $ | 65.0 |
|
Certain supply agreements with one of our customers include provisionsU.S. Iron Ore customer provide for supplemental revenue or refunds to the customer based on the customer’scustomer's average annual steel pricing or based on the average annual daily market price for hot-rolled coil steel at the yeartime the product is consumed in the customer’s blast furnace. The supplemental pricing is characterized as an embeddeda freestanding derivative. Refer to NOTE 13 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
NOTE 19 - EARNINGS PER SHARE
The following table summarizes the computation of basic and diluted earnings (loss) per share attributable to Cliffs shareholders:share:
| | | | (In Millions, Except Per Share Amounts) | (In Millions, Except Per Share Amounts) |
| | Year Ended December 31, | Year Ended
December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
Net Income (Loss) from Continuing Operations
attributable to Cliffs shareholders | $ | (7,224.2 | ) | | $ | 411.5 |
| | $ | (935.3 | ) | |
Income (Loss) and Gain on Sale from Discontinued Operations, net of tax | — |
| | 2.0 |
| | 35.9 |
| |
| Income from Continuing Operations | | $ | 381.8 |
| | $ | 219.2 |
| | $ | 143.7 |
|
Loss (Income) from Continuing Operations attributable to
Noncontrolling Interest | | 3.9 |
| | (25.2 | ) | | (8.6 | ) |
Net Income from Continuing Operations
attributable to Cliffs shareholders | | $ | 385.7 |
| | $ | 194.0 |
| | $ | 135.1 |
|
| Loss from Discontinued Operations, net of tax | | (18.7 | ) | | (19.9 | ) | | (884.4 | ) |
| NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | (7,224.2 | ) | | $ | 413.5 |
| | $ | (899.4 | ) | $ | 367.0 |
| | $ | 174.1 |
| | $ | (749.3 | ) |
| PREFERRED STOCK DIVIDENDS | (51.2 | ) | | (48.7 | ) | | — |
| — |
| | — |
| | (38.4 | ) |
| NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS | $ | (7,275.4 | ) | | $ | 364.8 |
| | $ | (899.4 | ) | $ | 367.0 |
| | $ | 174.1 |
| | $ | (787.7 | ) |
| Weighted Average Number of Shares: | | | | | | | | | | |
| Basic | 153.1 |
| | 151.7 |
| | 142.4 |
| 288.4 |
| | 197.7 |
| | 153.2 |
|
| Depositary Shares | — |
| | 0.5 |
| | — |
| |
| Employee Stock Plans | — |
| | 22.1 |
| | — |
| 4.6 |
| | 2.4 |
| | 0.4 |
|
| Diluted | 153.1 |
| | 174.3 |
| | 142.4 |
| 293.0 |
| | 200.1 |
| | 153.6 |
|
Earnings (loss) per Common Share Attributable to
Cliffs Common Shareholders - Basic: | | | | | | |
Earnings (Loss) per Common Share Attributable to
Cliffs Common Shareholders - Basic: | | | | | | |
| Continuing operations | $ | (47.52 | ) | | $ | 2.39 |
| | $ | (6.57 | ) | $ | 1.34 |
| | $ | 0.98 |
| | $ | 0.63 |
|
| Discontinued operations | — |
| | 0.01 |
| | 0.25 |
| (0.06 | ) | | (0.10 | ) | | (5.77 | ) |
| | $ | (47.52 | ) | | $ | 2.40 |
| | $ | (6.32 | ) | $ | 1.28 |
| | $ | 0.88 |
| | $ | (5.14 | ) |
Earnings (loss) per Common Share Attributable to
Cliffs Common Shareholders - Diluted: | | | | | | |
Earnings (Loss) per Common Share Attributable to
Cliffs Common Shareholders - Diluted: | | | | | | |
| Continuing operations | $ | (47.52 | ) | | $ | 2.36 |
| | $ | (6.57 | ) | $ | 1.32 |
| | $ | 0.97 |
| | $ | 0.63 |
|
| Discontinued operations | — |
| | 0.01 |
| | 0.25 |
| (0.06 | ) | | (0.10 | ) | | (5.76 | ) |
| | $ | (47.52 | ) | | $ | 2.37 |
| | $ | (6.32 | ) | $ | 1.26 |
| | $ | 0.87 |
| | $ | (5.13 | ) |
2017 were not included in the computation of diluted earnings per common share as we have the ability and intent, both currently and in the future, to settle these in cash. The diluted earnings per share calculation excludes 25.225.3 million depositary shares that were anti-dilutive for the year ended December 31, 2014. Additionally, the diluted earnings per share calculation excludes 0.7 million shares2015. Refer to NOTE 5 - DEBT AND CREDIT FACILITIES for the year ended December 31, 2014 related to equity plan awards that were anti-dilutive. There was no anti-dilution for the year ended December 31, 2013. For the year ended December 31, 2012, the diluted earnings per share calculation excludes 0.5 million shares related to equity plan awards that were anti-dilutive.further information.
NOTE 20 - COMMITMENTS AND CONTINGENCIES
Contingencies
Litigation
We are currently athe subject of, or party to, various claims and legal proceedings incidental to our operations. If management believes that a loss arising from these matters is probable and can reasonably be estimated, we record the amount of the loss or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Based on currently available information, management believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material effect on our financial position, results of operations or cash flows. However, litigation isthese claims and legal proceedings are subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include monetary damages, additional funding requirements or an injunction. If an unfavorable ruling were to occur, there exists the possibility of a material impact on the financial position and results of operations offor the period in which the ruling occurs or future periods. However, we do not believe that any pending litigationclaims or legal proceedings will not result in a material liability in relation to our consolidated financial statements.
Currently, we have recorded a liability in the Statements of Consolidated Financial Position related to the following legal matters:
Michigan Electricity Matters. On February 19, 2015, in connection with various proceedings before FERC with respect to certain cost allocations for continued operation of the Presque Isle Power Plant in Marquette, Michigan, FERC issued an order directing MISO to submit a revised methodology for allocating SSR costs that identified the load serving entities that require the operation of SSR units at the power plant for reliability purposes. On September 17, 2015, FERC issued an order conditionally approving MISO’s revised allocation methodology. On September 22, 2016, FERC denied requests for rehearing of the February 19 order, rejecting arguments that FERC did not have the authority to order refunds in a cost allocation case and to impose retroactive surcharges to effectuate such refunds. FERC, however, suspended any refunds and surcharges pending its review of a July 25, 2016 ALJ initial decision on the appropriate amount of SSR compensation. On November 8, 2016, Tilden and Empire, along with various Michigan-aligned parties, filed petitions for review of FERC’s order regarding allocation and non-cost SSR issues with the U.S. Court of Appeals for the D.C. Circuit. On January 27, 2017, Tilden, Empire and other appellants filed a motion to terminate further abeyance of briefing so that cost allocation issues could be heard at the Court of Appeals, which motion was granted on April 4, 2017. Should retroactive surcharges be permitted, our current estimate of the potential liability to the Empire and Tilden mines is $12.3 million, based on FERC's October 19, 2017 Order reviewing the July 25, 2016 ALJ initial decision. We will continue to vigorously challenge the retroactive imposition of any SSR costs before the U.S. Court of Appeals for the D.C. Circuit. As of December 31, 2017 and December 31, 2016, $12.3 million and $13.6 million, respectively, is included in our Statements of Consolidated Financial Position as part of Accrued expenses.
CCAA Proceedings
Effective January 27, 2015, following the commencement of CCAA proceedings for the Bloom Lake Group, we deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries comprising substantially all of our Canadian operations. Additionally, on May 20, 2015, the Wabush Group commenced CCAA proceedings which resulted in the deconsolidation of the remaining Wabush Group entities that were not previously deconsolidated. As a result of this action, the CCAA protection granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate the reorganization of each of their businesses and operations.
Prior to the deconsolidations, certain of our wholly-owned subsidiaries made loans to the Canadian Entities for the purpose of funding their operations and had accounts receivable generated in the ordinary course of business. The loans, corresponding interest and the accounts receivable were considered intercompany transactions and eliminated in our consolidated financial statements. Since the deconsolidations, the loans, associated interest and accounts receivable are considered related party transactions and have been recognized in our consolidated financial statements at their estimated fair value of $51.6 million and $48.6 million classified as Loans to and accounts receivables from the Canadian Entities in the Statements of Consolidated Financial Position at December 31, 2017 and 2016, respectively.
As of December 31, 2017, CCAA proceedings are ongoing and the majority of the assets of each of the Bloom Lake Group and the Wabush Group have been liquidated. The Monitor appointed by the court in the CCAA proceedings for the Bloom Lake Group and the Wabush Group has conducted a claims process pursuant to which creditors have filed claims against the Bloom Lake Group and the Wabush Group. The Monitor is reviewing all claims filed as part of this claims process. Currently, there is uncertainty as to the amount of the distribution that will be made to the creditors
of the Bloom Lake Group and the Wabush Group, including, if any, to us, and whether we could be held liable for claims that may be asserted by or on behalf of the Bloom Lake Group or the Wabush Group or by their respective representatives against non-debtor affiliates of the Bloom Lake Group and the Wabush Group.
The net proceeds of sale of the assets of the Bloom Lake Group and the Wabush Group are currently being held by the Monitor. Certain of these funds will be utilized to fund the accrued and ongoing costs of the CCAA proceedings and the remaining funds will be available for distribution to the creditors of the Bloom Lake Group and the Wabush Group.
During 2017, we became aware that it was probable the Monitor will assert a preference claim against the Company and/or certain of its affiliates. Given that it is probable the claim will be asserted by the Monitor, we have recorded an estimated liability of $55.6 million, which includes the value of our related-party claims against the Bloom Lake Group and the Wabush Group, classified as Contingent claims in the Statements of Consolidated Financial Position as of December 31, 2017 and included within Loss from Discontinued Operations, net of tax in the Statements of Consolidated Operations for the year ended December 31, 2017. Should the Monitor proceed to assert the claim, we believe the Monitor will demand an amount in excess of the value of our related-party claims against the Bloom Lake Group and the Wabush Group. Thus, it is possible that a change in the estimated liability may occur in the future. We deny liability for any amount and will vigorously defend such claim.
We previously recorded liabilities of $37.2 million related to guarantees for certain environmental obligations of the Canadian Entities, classified as Other liabilities in the Statements of Consolidated Financial Position as of December 31, 2016. During 2017, the Wabush Scully Mine was sold as part of the ongoing CCAA proceedings for the Wabush Group. As part of this transaction, we were required to fund the buyer's financial assurance shortfall of $7.7 million in order to complete the conveyance of the environmental remediation obligations to the buyer, which released us from our guarantees and resulted in a net gain of $31.4 million included in Loss from Discontinued Operations, net of tax in the Statements of Consolidated Operations.
Environmental Matters
We had environmental liabilities of $5.5$2.9 million and $8.4$2.8 million at December 31, 20142017 and 2013,2016, respectively, including obligations for known environmental remediation exposures at active and closed mining operations and other sites. These amounts have been recognized based on the estimated cost of investigation and remediation at each site, and include site studies, design and implementation of remediation plans, legal and consulting fees, and post-remediation monitoring and related activities. If the cost can only be estimated as a range of possible amounts with no specific amount being more likely, the minimum of the range is accrued. Future expenditures are not discounted unless the amount and timing of the cash disbursements are readily known. Potential insurance recoveries have not been reflected. Additional environmental obligations could be incurred, the extent of which cannot be assessed. The amount of our ultimate liability with respect to these matters may be affected by several uncertainties, primarily the ultimate cost of required remediation and the extent to which other responsible parties contribute. Refer to NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Tax Matters
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained when challenged by the taxing authorities. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period could be materially affected. An unfavorable tax settlement would require use of our cash and result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution. Refer to NOTE 9 - INCOME TAXES for further information.
NOTE 21 - SUBSEQUENT EVENTS
Common Share DividendWe have evaluated subsequent events through the date of financial issuance.
On January 26, 2015, we announced that our Board of Directors had decided to eliminate the quarterly dividend of $0.15 per share on our common shares. The decision is applicable to the first quarter of 2015 and all subsequent quarters. The elimination of the common share dividend provides us with additional free cash flow of approximately $92 million annually, which we intend to use for further debt reduction. We see accelerated debt reduction as a more effective means of protecting our shareholders than continuing to pay a common share dividend.
Credit Facility
On January 22, 2015, we amended the revolving credit agreement (Amendment No. 6) to effect the following:
Reduces the size of the existing facility from $1.125 billion to $900 million at the closing of this amendment with a further reduction to $750 million on May 31, 2015.
Permits certain of our subsidiaries and joint ventures related to our Canadian operations (collectively, the "Canadian Entities") to enter into a restructuring (the "Canadian Restructuring").
Permits costs and expenses incurred in connection with the Canadian Restructuring in an amount not to exceed $75 million to be added back to the calculation of EBITDA.
Adds limitations with respect to investments in the Canadian Entities after the Canadian Restructuring.
Adds limitations on the guaranty of indebtness of a Canadian Entity by us or our subsidiaries (other than by another Canadian Entity).
Permits additional liens on the assets of the Canadian Entities.
Reduces the permitted amount of quarterly dividends on our common shares to not more than $0.01 per share in any fiscal quarter.
Grants a security interest in our as-extracted collateral and certain of our subsidiaries.
Excludes certain indebtness and obligations of the Canadian Entities from the representations, covenants and events of default.
The amended facility retains substantial financial flexibility for management to execute our strategy and provides us a consistent source of liquidity.
Bloom Lake Group CCAA Filing
As we have previously disclosed, despite our cost-cutting progress at our Bloom Lake mine, we concluded that Phase I alone would not be economically feasible based on our current operating plans and that the mine must be further developed to reduce the overall cash cost of operations. However, also as previously disclosed, we would only develop Phase II of the Bloom Lake mine if we were able to secure new equity partners to share in the capital costs, which we estimated to be approximately $1.2 billion. As the new equity partners were unable to commit within the short timeframe we required, we determined that the Phase II expansion of the Bloom Lake mine was no longer a viable option for us so we shifted our focus to considering available possibilities and executing an exit option for Eastern Canadian Iron Ore operations that minimized the cash outflows and associated liabilities. In December 2014, iron ore production at the Bloom Lake mine was suspended and the Bloom Lake mine was placed in ‘‘care-and-maintenance’’ mode.
On January 27, 2015, we announced that the Bloom Lake Group had commenced restructuring proceedings in Montreal, Québec, under the CCAA. The Bloom Lake Group comprises the Canadian affiliates which own and/or operate the Bloom Lake mine or are subsidiaries of such affiliates.
The decision by the Bloom Lake Group to seek protection under the CCAA was based on a thorough legal and financial analysis of the options available. The Bloom Lake Group was no longer generating any revenues and was not able to meet its obligations as they became due. The initial CCAA order obtained on January 27, 2015 addresses the Bloom Lake Group’s immediate liquidity issues by staying creditor claims and permits the Bloom Lake Group to preserve and protect its assets for the benefit of all stakeholders while restructuring and/or sale options are explored.
As part of the CCAA process, the Court has appointed FTI Consulting Canada Inc. as the Monitor. The Monitor’s role in the CCAA process is to monitor the activities of the Bloom Lake Group and provide assistance to the Bloom Lake Group and its stakeholders in respect of the CCAA process.
We also filed on February 2, 2015 a Current Report on Form 8-K that provides pro forma financial information reflecting the deconsolidation of the Bloom Lake Group. Additional information regarding the CCAA proceedings are available on the Monitor’s website at http://cfcanada.fticonsulting.com/bloomlake.
NOTE 22 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The sum of quarterly EPS may not equal EPS for the year due to discrete quarterly calculations.
| | | | (In Millions, Except Per Share Amounts) | (In Millions, Except Per Share Amounts) |
| 2014 | 2017 |
| Quarters | | | Quarters | | |
| First | | Second | | Third | | Fourth | | Year | First | | Second | | Third | | Fourth | | Year |
| Revenues from product sales and services | $ | 940.0 |
| | $ | 1,100.8 |
| | $ | 1,298.2 |
| | $ | 1,284.7 |
| | $ | 4,623.7 |
| $ | 461.6 |
| | $ | 569.3 |
| | $ | 698.4 |
| | $ | 600.9 |
| | $ | 2,330.2 |
|
| Sales margin | 63.2 |
| | 92.0 |
| | 127.5 |
| | 168.7 |
| | 451.4 |
| 95.7 |
| | 145.1 |
| | 160.2 |
| | 100.7 |
| | 501.7 |
|
| Income (Loss) from Continuing Operations | | $ | (30.3 | ) | | $ | 76.5 |
| | $ | 20.6 |
| | $ | 315.0 |
| | $ | 381.8 |
|
| Loss from Continuing Operations attributable to Noncontrolling Interest | | 1.7 |
| | 1.7 |
| | 0.5 |
| | — |
| | 3.9 |
|
Net Income (Loss) from Continuing Operations attributable to Cliffs shareholders | $ | (70.3 | ) | | $ | 10.9 |
| | $ | (5,879.6 | ) | | $ | (1,285.1 | ) | | $ | (7,224.2 | ) | (28.6 | ) | | 78.2 |
| | 21.1 |
| | 315.0 |
| | 385.7 |
|
| Income from Discontinued Operations | — |
| | — |
| | — |
| | — |
| | — |
| |
| Net Income (Loss) Attributable to Cliffs Shareholders | $ | (70.3 | ) | | $ | 10.9 |
| | $ | (5,879.6 | ) | | $ | (1,285.1 | ) | | $ | (7,224.2 | ) | |
| Preferred Stock Dividends | $ | (12.8 | ) | | $ | (12.8 | ) | | $ | (12.8 | ) | | $ | (12.8 | ) | | $ | (51.2 | ) | |
| Net Income (Loss) Attributable to Cliffs Common Shareholders | $ | (83.1 | ) | | $ | (1.9 | ) | | $ | (5,892.4 | ) | | $ | (1,297.9 | ) | | $ | (7,275.4 | ) | |
Earnings per common share attributable to Cliffs common shareholders — Basic: |
| |
| |
| |
| |
| |
| Income (Loss) from Discontinued Operations, net of tax | | 0.5 |
| | (46.4 | ) | | 32.3 |
| | (5.1 | ) | | (18.7 | ) |
| NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | | $ | (28.1 | ) | | $ | 31.8 |
| | $ | 53.4 |
| | $ | 309.9 |
| | $ | 367.0 |
|
Earnings (Loss) per Common Share Attributable to
Cliffs Common Shareholders - Basic: | | | | | | | | | | |
| Continuing Operations | $ | (0.54 | ) | | $ | (0.01 | ) | | $ | (38.49 | ) | | $ | (8.48 | ) | | $ | (47.52 | ) | $ | (0.11 | ) | | $ | 0.26 |
| | $ | 0.07 |
| | $ | 1.06 |
| | $ | 1.34 |
|
| Discontinued Operations | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | (0.16 | ) | | 0.11 |
| | (0.02 | ) | | (0.06 | ) |
| | $ | (0.54 | ) | | $ | (0.01 | ) | | $ | (38.49 | ) | | $ | (8.48 | ) | | $ | (47.52 | ) | $ | (0.11 | ) | | $ | 0.10 |
| | $ | 0.18 |
| | $ | 1.04 |
| | $ | 1.28 |
|
Earnings per common share attributable to Cliffs common shareholders — Diluted: |
| |
| |
| |
| | | |
Earnings (Loss) per Common Share Attributable to
Cliffs Common Shareholders - Diluted: | | | | | | | | | | |
| Continuing Operations | $ | (0.54 | ) | | $ | (0.01 | ) | | $ | (38.49 | ) | | $ | (8.48 | ) | | $ | (47.52 | ) | $ | (0.11 | ) | | $ | 0.26 |
| | $ | 0.07 |
| | $ | 1.05 |
| | $ | 1.32 |
|
| Discontinued Operations | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | (0.15 | ) | | 0.11 |
| | (0.02 | ) | | (0.06 | ) |
| | $ | (0.54 | ) | | $ | (0.01 | ) | | $ | (38.49 | ) | | $ | (8.48 | ) | | $ | (47.52 | ) | $ | (0.11 | ) | | $ | 0.11 |
| | $ | 0.18 |
| | $ | 1.03 |
| | $ | 1.26 |
|
The diluted earnings per share calculation for all quarters of 2014 exclude depositary shares that were anti-dilutive totaling 25.2 million million and equity plan awards ranging between 0.3 million and 0.8 million each quarter that were anti-dilutive.
|
| | | | | | | | | | | | | | | | | | | |
| | 2013 |
| Quarters | | |
| First | | Second | | Third | | Fourth | | Year |
| Revenues from product sales and services | $ | 1,140.5 |
| | $ | 1,488.5 |
| | $ | 1,546.6 |
| | $ | 1,515.8 |
| | $ | 5,691.4 |
|
| Sales margin | 237.9 |
| | 268.2 |
| | 348.7 |
| | 294.5 |
| | 1,149.3 |
|
Net Income (Loss) from Continuing Operations attributable to Cliffs shareholders | $ | 107.0 |
| | $ | 146.0 |
| | $ | 115.2 |
| | $ | 43.3 |
| | $ | 411.5 |
|
Income (Loss) and Gain on Sale from Discontinued Operations, net of tax | — |
| | — |
| | 2.0 |
| | — |
| | 2.0 |
|
| Net Income Attributable to Cliffs Shareholders | $ | 107.0 |
| | $ | 146.0 |
| | $ | 117.2 |
| | $ | 43.3 |
| | $ | 413.5 |
|
Earnings per common share attributable to Cliffs common shareholders — Basic: |
| |
| |
| |
| |
|
| Continuing Operations | $ | 0.66 |
| | $ | 0.87 |
| | $ | 0.67 |
| | $ | 0.20 |
| | $ | 2.39 |
|
| Discontinued Operations | — |
| | — |
| | 0.01 |
| | — |
| | 0.01 |
|
| | $ | 0.66 |
| | $ | 0.87 |
| | $ | 0.68 |
| | $ | 0.20 |
| | $ | 2.40 |
|
Earnings per common share attributable to
Cliffs common shareholders — Diluted: |
| |
| |
| |
| |
|
| Continuing Operations | $ | 0.66 |
| | $ | 0.82 |
| | $ | 0.65 |
| | $ | 0.20 |
| | $ | 2.36 |
|
| Discontinued Operations | — |
| | — |
| | 0.01 |
| | — |
| | 0.01 |
|
| | $ | 0.66 |
| | $ | 0.82 |
| | $ | 0.66 |
| | $ | 0.20 |
| | $ | 2.37 |
|
The diluted earnings per share calculation for the first and fourth quartersquarter of 2013 exclude depositary shares2017 excludes equity plan awards of 4.6 million that were anti-dilutive totaling 12.9 million and 25.2 million, respectively.
Fourth Quarter Results
Duringanti-dilutive. There was no anti-dilution in the second, third or fourth quarter of 2014, we recorded impairment charges2017.
|
| | | | | | | | | | | | | | | | | | | |
| | (In Millions, Except Per Share Amounts) |
| | 2016 |
| Quarters | | |
| First | | Second | | Third | | Fourth | | Year |
| Revenues from product sales and services | $ | 305.5 |
| | $ | 496.2 |
| | $ | 553.3 |
| | $ | 754.0 |
| | $ | 2,109.0 |
|
| Sales margin | 30.9 |
| | 91.5 |
| | 85.4 |
| | 181.5 |
| | 389.3 |
|
| Income (Loss) from Continuing Operations | $ | 114.3 |
| | $ | 29.9 |
| | $ | (25.1 | ) | | $ | 100.1 |
| | $ | 219.2 |
|
| Loss (Income) from Continuing Operations attributable to Noncontrolling Interest | (8.8 | ) | | (16.7 | ) | | 2.0 |
| | (1.7 | ) | | (25.2 | ) |
| Net Income (Loss) from Continuing Operations attributable to Cliffs shareholders | $ | 105.5 |
| | $ | 13.2 |
| | $ | (23.1 | ) | | $ | 98.4 |
| | $ | 194.0 |
|
| Income (Loss) from Discontinued Operations, net of tax | 2.5 |
| | (0.4 | ) | | (2.7 | ) | | (19.3 | ) | | (19.9 | ) |
| NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS | $ | 108.0 |
| | $ | 12.8 |
| | $ | (25.8 | ) | | $ | 79.1 |
| | $ | 174.1 |
|
Earnings (Loss) per Common Share Attributable to
Cliffs Common Shareholders - Basic: | | | | | | | | | |
| Continuing Operations | $ | 0.61 |
| | $ | 0.07 |
| | $ | (0.11 | ) | | $ | 0.43 |
| | $ | 0.98 |
|
| Discontinued Operations | 0.01 |
| | — |
| | (0.01 | ) | | (0.08 | ) | | (0.10 | ) |
| | $ | 0.62 |
| | $ | 0.07 |
| | $ | (0.12 | ) | | $ | 0.35 |
| | $ | 0.88 |
|
Earnings (Loss) per Common Share Attributable to
Cliffs Common Shareholders - Diluted: | | | | | | | | | |
| Continuing Operations | $ | 0.61 |
| | $ | 0.07 |
| | $ | (0.11 | ) | | $ | 0.42 |
| | $ | 0.97 |
|
| Discontinued Operations | 0.01 |
| | — |
| | (0.01 | ) | | (0.08 | ) | | (0.10 | ) |
| | $ | 0.62 |
| | $ | 0.07 |
| | $ | (0.12 | ) | | $ | 0.34 |
| | $ | 0.87 |
|
The diluted earnings per share calculation for the third quarter of $1.3 billion primarily related to Bloom Lake and driven mainly by2016 excludes equity plan awards of 3.0 million that were anti-dilutive. There was no anti-dilution in the changes in life-of-mine cash flows due to declining market pricing. Also, during thefirst, second or fourth quarter of 2014, we completed2016.
NOTE 23 - SUPPLEMENTARY GUARANTOR INFORMATION
The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” Certain of our subsidiaries have guaranteed the saleobligations under the $1.075 billion 5.75% 2025 Senior Notes issued by Cleveland-Cliffs Inc. See NOTE 5 - DEBT AND CREDIT FACILITIES for further information.
The following presents the condensed consolidating financial information for: (i) the Parent Company and the Issuer of the CLCC assets for $174.0 million in cash andguaranteed obligations (Cleveland-Cliffs Inc.); (ii) the assumption of certain liabilities, of which $155.0 million has been collected, and resulted in a loss on the sale of these assets of $419.6 million. The fourth quarter 2014 results additionally included an income tax benefit of $289.7 million, which includes the benefits related to the impairment charges as well as the recognition of a lossGuarantor subsidiaries, on a financial guarantycombined basis; (iii) the non-guarantor subsidiaries, on a combined basis; (iv) consolidating eliminations; and (v) Cleveland-Cliffs Inc. and Subsidiaries on a consolidated basis. Each Guarantor subsidiary is 100% owned by the sale of CLCC assets.
Upon performing our annual goodwill impairment test in the fourth quarter of 2013, a goodwill impairment charge of $80.9 million million was recorded for our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment. We also recorded an other long-lived asset impairment charge of $154.6 million related to our Wabush operations within our Eastern Canadian Iron Ore operating segment to reduce those assets to their estimated fair valueParent Company as of December 31, 2013. All of these charges impacted Impairment of goodwill and other long-lived assets.
As discussed in NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, we recorded an adjustment to correct an immaterial prior period error in2017. The condensed consolidating financial information is presented as if the noncontrolling interest related to Bloom Lake. Accordingly, the adjustment was recorded prospectively in the Statements of Consolidated Operations for the period endedGuarantor structure at December 31, 2013 and in2017 existed for all years presented. As a result, the Statements of Consolidated Financial PositionGuarantor subsidiaries within the condensed consolidating financial information as of December 31, 2013. The adjustment to noncontrolling interest related to Bloom Lake was approximately $45.1 million2017 and resulted in an increase to Net Income (Loss) Attributable to Cliffs Shareholders2016 and a reduction of Loss attributable to noncontrolling interest and corresponding decrease to Noncontrolling interest in the Statements of Consolidated Financial Position for the three months ended and yearyears ended December 31, 2013.2017, 2016 and 2015 include results of subsidiaries that were previously less than wholly-owned and were historically non-guarantors until 100% ownership was obtained.
Each of the Guarantor subsidiaries fully and unconditionally guarantee, on a joint and several basis, the obligations of Cleveland-Cliffs Inc. under the $1.075 billion 5.75% 2025 Senior Notes. The adjustments also resultedguarantee of a Guarantor subsidiary will be automatically and unconditionally released and discharged, and such Guarantor subsidiary’s obligations under the guarantee and the related indenture governing the $1.075 billion 5.75% 2025 Senior Notes (the “Indenture”) will be automatically and unconditionally released and discharged, upon:
(a) any sale, exchange, transfer or disposition of such Guarantor subsidiary (by merger, consolidation, or the sale of) or the capital stock of such Guarantor subsidiary after which the applicable Guarantor subsidiary is no longer a subsidiary of the Company or the sale of all or substantially all of such Guarantor subsidiary’s assets (other than by lease);
(b) upon designation of any Guarantor subsidiary as an “excluded subsidiary” (as defined in an increase to basicthe Indenture); and diluted earnings per common share
(c) upon defeasance or satisfaction and discharge of $0.29the Indenture.
Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements. The accompanying condensed consolidating financial information has been presented on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the three months ended December 31, 2013.subsidiaries’ cumulative results of operations, capital contributions and distributions, and other changes in equity. Elimination entries include consolidating and eliminating entries for investments in subsidiaries, and intra-entity activity and balances.
Refer to NOTE 12 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES, NOTE 4 - PROPERTY, PLANT AND EQUIPMENT and NOTE 9 - INCOME TAXES for further information.
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statement of Financial Position |
| As of December 31, 2017 |
| (In Millions) |
| | Cleveland-Cliffs Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| ASSETS | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | |
| Cash and cash equivalents | $ | 948.9 |
| | $ | 2.1 |
| | $ | 56.7 |
| | $ | — |
| | $ | 1,007.7 |
|
| Accounts receivable, net | 4.5 |
| | 102.9 |
| | 33.9 |
| | (0.7 | ) | | 140.6 |
|
| Inventories | — |
| | 138.4 |
| | 45.0 |
| | — |
| | 183.4 |
|
| Supplies and other inventories | — |
| | 88.8 |
| | 5.1 |
| | — |
| | 93.9 |
|
| Derivative assets | — |
| | 37.9 |
| | 1.5 |
| | — |
| | 39.4 |
|
| Loans to and accounts receivables from the Canadian Entities | 44.7 |
| | 6.9 |
| | — |
| | — |
| | 51.6 |
|
| Other current assets | 16.4 |
| | 7.5 |
| | 4.1 |
| | — |
| | 28.0 |
|
| TOTAL CURRENT ASSETS | 1,014.5 |
| | 384.5 |
| | 146.3 |
| | (0.7 | ) | | 1,544.6 |
|
| PROPERTY, PLANT AND EQUIPMENT, NET | 17.5 |
| | 959.0 |
| | 74.5 |
| | — |
| | 1,051.0 |
|
| INCOME TAX RECEIVABLE | 235.3 |
| | — |
| | — |
| | — |
| | 235.3 |
|
| INVESTMENT IN SUBSIDIARIES | 1,024.3 |
| | 29.9 |
| | — |
| | (1,054.2 | ) | | — |
|
| LONG-TERM INTERCOMPANY NOTES | — |
| | — |
| | 242.0 |
| | (242.0 | ) | | — |
|
| OTHER NON-CURRENT ASSETS | 7.8 |
| | 93.0 |
| | 21.7 |
| | — |
| | 122.5 |
|
| TOTAL ASSETS | $ | 2,299.4 |
| | $ | 1,466.4 |
| | $ | 484.5 |
| | $ | (1,296.9 | ) | | $ | 2,953.4 |
|
| LIABILITIES | | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | | |
| Accounts payable | $ | 7.1 |
| | $ | 89.7 |
| | $ | 31.6 |
| | $ | (0.7 | ) | | $ | 127.7 |
|
| Accrued employment costs | 13.7 |
| | 38.9 |
| | 3.5 |
| | — |
| | 56.1 |
|
| State and local taxes payable | — |
| | 30.0 |
| | 0.2 |
| | — |
| | 30.2 |
|
| Accrued expenses | 5.3 |
| | 13.2 |
| | 15.2 |
| | — |
| | 33.7 |
|
| Accrued interest | 31.4 |
| | — |
| | — |
| | — |
| | 31.4 |
|
| Accrued royalties | — |
| | 7.8 |
| | 9.5 |
| | — |
| | 17.3 |
|
| Contingent claims | 55.6 |
| | — |
| | — |
| | — |
| | 55.6 |
|
| Partnership distribution payable | — |
| | 44.2 |
| | — |
| | — |
| | 44.2 |
|
| Other current liabilities | 2.1 |
| | 33.5 |
| | 20.4 |
| | — |
| | 56.0 |
|
| TOTAL CURRENT LIABILITIES | 115.2 |
| | 257.3 |
| | 80.4 |
| | (0.7 | ) | | 452.2 |
|
| POSTEMPLOYMENT BENEFIT LIABILITIES | | | | | | | | | |
| Pensions | 59.2 |
| | 403.6 |
| | (240.0 | ) | | — |
| | 222.8 |
|
| Other postretirement benefits | 7.2 |
| | 27.0 |
| | 0.7 |
| | — |
| | 34.9 |
|
| TOTAL POSTEMPLOYMENT BENEFIT LIABILITIES | 66.4 |
| | 430.6 |
| | (239.3 | ) | | — |
| | 257.7 |
|
| ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS | — |
| | 140.6 |
| | 55.9 |
| | — |
| | 196.5 |
|
| LONG-TERM DEBT | 2,304.2 |
| | — |
| | — |
| | — |
| | 2,304.2 |
|
| LONG-TERM INTERCOMPANY NOTES | 242.0 |
| | — |
| | — |
| | (242.0 | ) | | — |
|
| OTHER LIABILITIES | 15.7 |
| | 147.2 |
| | 24.0 |
| | — |
| | 186.9 |
|
| TOTAL LIABILITIES | 2,743.5 |
| | 975.7 |
| | (79.0 | ) | | (242.7 | ) | | 3,397.5 |
|
| COMMITMENTS AND CONTINGENCIES | | | | | | | | | |
| EQUITY | | | | | | | | | |
| TOTAL CLIFFS SHAREHOLDERS' DEFICIT | (444.1 | ) | | 490.7 |
| | 563.3 |
| | (1,054.2 | ) | | (444.3 | ) |
| NONCONTROLLING INTEREST | — |
| | — |
| | 0.2 |
| | — |
| | 0.2 |
|
| TOTAL DEFICIT | (444.1 | ) | | 490.7 |
| | 563.5 |
| | (1,054.2 | ) | | (444.1 | ) |
| TOTAL LIABILITIES AND DEFICIT | $ | 2,299.4 |
| | $ | 1,466.4 |
| | $ | 484.5 |
| | $ | (1,296.9 | ) | | $ | 2,953.4 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statement of Financial Position |
| As of December 31, 2016 |
| (In Millions) |
| | Cleveland-Cliffs Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| ASSETS | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | |
| Cash and cash equivalents | $ | 283.4 |
| | $ | 2.5 |
| | $ | 37.5 |
| | $ | — |
| | $ | 323.4 |
|
| Accounts receivable, net | 4.5 |
| | 59.3 |
| | 65.7 |
| | (0.8 | ) | | 128.7 |
|
| Inventories | — |
| | 137.0 |
| | 41.4 |
| | — |
| | 178.4 |
|
| Supplies and other inventories | — |
| | 86.4 |
| | 5.0 |
| | — |
| | 91.4 |
|
| Derivative assets | — |
| | 31.7 |
| | 1.4 |
| | — |
| | 33.1 |
|
| Loans to and accounts receivables from the Canadian Entities | 41.7 |
| | 6.9 |
| | — |
| | — |
| | 48.6 |
|
| Other current assets | 8.6 |
| | 8.2 |
| | 4.2 |
| | — |
| | 21.0 |
|
| TOTAL CURRENT ASSETS | 338.2 |
| | 332.0 |
| | 155.2 |
| | (0.8 | ) | | 824.6 |
|
| PROPERTY, PLANT AND EQUIPMENT, NET | 21.4 |
| | 937.7 |
| | 25.3 |
| | — |
| | 984.4 |
|
| INVESTMENT IN SUBSIDIARIES | 882.4 |
| | 24.6 |
| | — |
| | (907.0 | ) | | — |
|
| LONG-TERM INTERCOMPANY NOTES | — |
| | — |
| | 197.0 |
| | (197.0 | ) | | — |
|
| OTHER NON-CURRENT ASSETS | 11.0 |
| | 94.1 |
| | 9.8 |
| | — |
| | 114.9 |
|
| TOTAL ASSETS | $ | 1,253.0 |
| | $ | 1,388.4 |
| | $ | 387.3 |
| | $ | (1,104.8 | ) | | $ | 1,923.9 |
|
| LIABILITIES | | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | | |
| Accounts payable | $ | 1.6 |
| | $ | 92.6 |
| | $ | 14.2 |
| | $ | (0.8 | ) | | $ | 107.6 |
|
| Accrued employment costs | 15.6 |
| | 34.6 |
| | 5.9 |
| | — |
| | 56.1 |
|
| State and local taxes payable | — |
| | 28.1 |
| | 0.2 |
| | — |
| | 28.3 |
|
| Accrued expenses | 7.6 |
| | 14.4 |
| | 19.1 |
| | — |
| | 41.1 |
|
| Accrued interest | 40.2 |
| | — |
| | — |
| | — |
| | 40.2 |
|
| Accrued royalties | — |
| | 13.0 |
| | 13.2 |
| | — |
| | 26.2 |
|
| Partnership distribution payable | — |
| | 8.7 |
| | — |
| | — |
| | 8.7 |
|
| Other current liabilities | 23.0 |
| | 35.3 |
| | 24.6 |
| | — |
| | 82.9 |
|
| TOTAL CURRENT LIABILITIES | 88.0 |
| | 226.7 |
| | 77.2 |
| | (0.8 | ) | | 391.1 |
|
| POSTEMPLOYMENT BENEFIT LIABILITIES | | | | | | | | | |
| Pensions | 56.9 |
| | 397.4 |
| | (208.6 | ) | | — |
| | 245.7 |
|
| Other postretirement benefits | 7.6 |
| | 26.5 |
| | 0.7 |
| | — |
| | 34.8 |
|
| TOTAL POSTEMPLOYMENT BENEFIT LIABILITIES | 64.5 |
| | 423.9 |
| | (207.9 | ) | | — |
| | 280.5 |
|
| ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS | — |
| | 153.9 |
| | 40.0 |
| | — |
| | 193.9 |
|
| LONG-TERM DEBT | 2,175.1 |
| | — |
| | — |
| | — |
| | 2,175.1 |
|
| LONG-TERM INTERCOMPANY NOTES | 197.0 |
| | — |
| | — |
| | (197.0 | ) | | — |
|
| OTHER LIABILITIES | 58.9 |
| | 118.8 |
| | 36.1 |
| | — |
| | 213.8 |
|
| TOTAL LIABILITIES | 2,583.5 |
| | 923.3 |
| | (54.6 | ) | | (197.8 | ) | | 3,254.4 |
|
| COMMITMENTS AND CONTINGENCIES | | | | | | | | | |
| EQUITY | | | | | | | | | |
| TOTAL CLIFFS SHAREHOLDERS' DEFICIT | (1,330.5 | ) | | 331.5 |
| | 441.7 |
| | (907.0 | ) | | (1,464.3 | ) |
| NONCONTROLLING INTEREST | — |
| | 133.6 |
| | 0.2 |
| | — |
| | 133.8 |
|
| TOTAL DEFICIT | (1,330.5 | ) | | 465.1 |
| | 441.9 |
| | (907.0 | ) | | (1,330.5 | ) |
| TOTAL LIABILITIES AND DEFICIT | $ | 1,253.0 |
| | $ | 1,388.4 |
| | $ | 387.3 |
| | $ | (1,104.8 | ) | | $ | 1,923.9 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) |
| For the Year Ended December 31, 2017 |
| (In Millions) |
| | Cleveland-Cliffs Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| REVENUES FROM PRODUCT SALES AND SERVICES | | | | | | | | | |
| Product | $ | — |
| | $ | 1,644.6 |
| | $ | 444.6 |
| | $ | — |
| | $ | 2,089.2 |
|
| Freight and venture partners' cost reimbursements | — |
| | 221.4 |
| | 19.6 |
| | — |
| | 241.0 |
|
| | — |
| | 1,866.0 |
| | 464.2 |
| | — |
| | 2,330.2 |
|
| COST OF GOODS SOLD AND OPERATING EXPENSES | — |
| | (1,400.6 | ) | | (427.9 | ) | | — |
| | (1,828.5 | ) |
| SALES MARGIN | — |
| | 465.4 |
| | 36.3 |
| | — |
| | 501.7 |
|
| OTHER OPERATING INCOME (EXPENSE) | | | | | | | | | |
| Selling, general and administrative expenses | (81.4 | ) | | (24.7 | ) | | 0.3 |
| | — |
| | (105.8 | ) |
| Miscellaneous - net | (2.2 | ) | | 12.3 |
| | 17.6 |
| | — |
| | 27.7 |
|
| | (83.6 | ) | | (12.4 | ) | | 17.9 |
| | — |
| | (78.1 | ) |
| OPERATING INCOME (LOSS) | (83.6 | ) | | 453.0 |
| | 54.2 |
| | — |
| | 423.6 |
|
| OTHER INCOME (EXPENSE) | | | | | | | | | |
| Interest expense, net | (126.8 | ) | | (1.0 | ) | | (4.2 | ) | | — |
| | (132.0 | ) |
| Loss on extinguishment/restructuring of debt | (165.4 | ) | | — |
| | — |
| | — |
| | (165.4 | ) |
| Other non-operating income | 0.1 |
| | 3.1 |
| | — |
| | — |
| | 3.2 |
|
| | (292.1 | ) | | 2.1 |
| | (4.2 | ) | | — |
| | (294.2 | ) |
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (375.7 | ) | | 455.1 |
| | 50.0 |
| | — |
| | 129.4 |
|
| INCOME TAX BENEFIT (EXPENSE) | 251.4 |
| | 1.3 |
| | (0.3 | ) | | — |
| | 252.4 |
|
| EQUITY IN INCOME OF SUBSIDIARIES | 512.6 |
| | 11.8 |
| | — |
| | (524.4 | ) | | — |
|
| INCOME FROM CONTINUING OPERATIONS | 388.3 |
| | 468.2 |
| | 49.7 |
| | (524.4 | ) | | 381.8 |
|
| LOSS (INCOME) FROM DISCONTINUED OPERATIONS, net of tax | (21.3 | ) | | 1.7 |
| | 0.9 |
| | — |
| | (18.7 | ) |
| NET INCOME | 367.0 |
| | 469.9 |
| | 50.6 |
| | (524.4 | ) | | 363.1 |
|
| LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST | — |
| | 3.9 |
| | — |
| | — |
| | 3.9 |
|
| NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 367.0 |
| | $ | 473.8 |
| | $ | 50.6 |
| | $ | (524.4 | ) | | $ | 367.0 |
|
| OTHER COMPREHENSIVE INCOME (LOSS) | (4.0 | ) | | 12.8 |
| | (5.2 | ) | | (7.6 | ) | | (4.0 | ) |
| TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 363.0 |
| | $ | 486.6 |
| | $ | 45.4 |
| | $ | (532.0 | ) | | $ | 363.0 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) |
| For the Year Ended December 31, 2016 |
| (In Millions) |
| | Cleveland-Cliffs Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| REVENUES FROM PRODUCT SALES AND SERVICES | | | | | | | | | |
| Product | $ | — |
| | $ | 1,379.6 |
| | $ | 533.9 |
| | $ | — |
| | $ | 1,913.5 |
|
| Freight and venture partners' cost reimbursements | — |
| | 174.9 |
| | 20.6 |
| | — |
| | 195.5 |
|
| | — |
| | 1,554.5 |
| | 554.5 |
| | — |
| | 2,109.0 |
|
| COST OF GOODS SOLD AND OPERATING EXPENSES | — |
| | (1,278.8 | ) | | (440.9 | ) | | — |
| | (1,719.7 | ) |
| SALES MARGIN | — |
| | 275.7 |
| | 113.6 |
| | — |
| | 389.3 |
|
| OTHER OPERATING INCOME (EXPENSE) | | | | | | | | | |
| Selling, general and administrative expenses | (97.9 | ) | | (20.8 | ) | | 0.9 |
| | — |
| | (117.8 | ) |
| Miscellaneous - net | (5.6 | ) | | (10.8 | ) | | (14.3 | ) | | — |
| | (30.7 | ) |
| | (103.5 | ) | | (31.6 | ) | | (13.4 | ) | | — |
| | (148.5 | ) |
| OPERATING INCOME (LOSS) | (103.5 | ) | | 244.1 |
| | 100.2 |
| | — |
| | 240.8 |
|
| OTHER INCOME (EXPENSE) | | | | | | | | | |
| Interest expense, net | (195.0 | ) | | 0.6 |
| | (6.1 | ) | | — |
| | (200.5 | ) |
| Gain on extinguishment/restructuring of debt | 166.3 |
| | — |
| | — |
| | — |
| | 166.3 |
|
| Other non-operating income (expense) | (0.5 | ) | | 0.4 |
| | 0.5 |
| | — |
| | 0.4 |
|
| | (29.2 | ) | | 1.0 |
| | (5.6 | ) | | — |
| | (33.8 | ) |
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (132.7 | ) | | 245.1 |
| | 94.6 |
| | — |
| | 207.0 |
|
| INCOME TAX BENEFIT | 4.3 |
| | 3.0 |
| | 4.9 |
| | — |
| | 12.2 |
|
| EQUITY IN INCOME OF SUBSIDIARIES | 319.6 |
| | 13.7 |
| | — |
| | (333.3 | ) | | — |
|
| INCOME FROM CONTINUING OPERATIONS | 191.2 |
| | 261.8 |
| | 99.5 |
| | (333.3 | ) | | 219.2 |
|
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | (17.1 | ) | | 2.6 |
| | (5.4 | ) | | — |
| | (19.9 | ) |
| NET INCOME | 174.1 |
| | 264.4 |
| | 94.1 |
| | (333.3 | ) | | 199.3 |
|
| INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST | — |
| | (25.2 | ) | | — |
| | — |
| | (25.2 | ) |
| NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 174.1 |
| | $ | 239.2 |
| | $ | 94.1 |
| | $ | (333.3 | ) | | $ | 174.1 |
|
| OTHER COMPREHENSIVE INCOME (LOSS) | (3.3 | ) | | (20.7 | ) | | 13.8 |
| | 6.9 |
| | (3.3 | ) |
| TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 170.8 |
| | $ | 218.5 |
| | $ | 107.9 |
| | $ | (326.4 | ) | | $ | 170.8 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) |
| For the Year Ended December 31, 2015 |
| (In Millions) |
| | Cleveland-Cliffs Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| REVENUES FROM PRODUCT SALES AND SERVICES | | | | | | | | | |
| Product | $ | — |
| | $ | 1,368.1 |
| | $ | 464.3 |
| | $ | — |
| | $ | 1,832.4 |
|
| Freight and venture partners' cost reimbursements | — |
| | 157.3 |
| | 23.6 |
| | — |
| | 180.9 |
|
| | — |
| | 1,525.4 |
| | 487.9 |
| | — |
| | 2,013.3 |
|
| COST OF GOODS SOLD AND OPERATING EXPENSES | — |
| | (1,298.3 | ) | | (478.5 | ) | | — |
| | (1,776.8 | ) |
| SALES MARGIN | — |
| | 227.1 |
| | 9.4 |
| | — |
| | 236.5 |
|
| OTHER OPERATING INCOME (EXPENSE) | | | | | | | | | |
| Selling, general and administrative expenses | (88.5 | ) | | (21.2 | ) | | (0.3 | ) | | — |
| | (110.0 | ) |
| Miscellaneous - net | 7.7 |
| | (3.0 | ) | | 20.1 |
| | — |
| | 24.8 |
|
| | (80.8 | ) | | (24.2 | ) | | 19.8 |
| | — |
| | (85.2 | ) |
| OPERATING INCOME (LOSS) | (80.8 | ) | | 202.9 |
| | 29.2 |
| | — |
| | 151.3 |
|
| OTHER INCOME (EXPENSE) | | | | | | | | | |
| Interest expense, net | (221.4 | ) | | (0.1 | ) | | (7.0 | ) | | — |
| | (228.5 | ) |
| Gain on extinguishment/restructuring of debt | 392.9 |
| | — |
| | — |
| | — |
| | 392.9 |
|
| Other non-operating income (expense) | (114.6 | ) | | 1.2 |
| | 110.8 |
| | — |
| | (2.6 | ) |
| | 56.9 |
| | 1.1 |
| | 103.8 |
| | — |
| | 161.8 |
|
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY LOSS FROM VENTURES | (23.9 | ) | | 204.0 |
| | 133.0 |
| | — |
| | 313.1 |
|
| INCOME TAX BENEFIT (EXPENSE) | (19.1 | ) | | (176.3 | ) | | 26.1 |
| | — |
| | (169.3 | ) |
| EQUITY IN INCOME (LOSS) OF SUBSIDIARIES | (501.2 | ) | | 12.9 |
| | — |
| | 488.3 |
| | — |
|
| EQUITY LOSS FROM VENTURES, net of tax | — |
| | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
| INCOME (LOSS) FROM CONTINUING OPERATIONS | (544.2 | ) | | 40.6 |
| | 159.0 |
| | 488.3 |
| | 143.7 |
|
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | (205.1 | ) | | (762.2 | ) | | 75.2 |
| | — |
| | (892.1 | ) |
| NET INCOME (LOSS) | (749.3 | ) | | (721.6 | ) | | 234.2 |
| | 488.3 |
| | (748.4 | ) |
| LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST | — |
| | (8.6 | ) | | 7.7 |
| | — |
| | (0.9 | ) |
| NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | (749.3 | ) | | $ | (730.2 | ) | | $ | 241.9 |
| | $ | 488.3 |
| | $ | (749.3 | ) |
| PREFERRED STOCK DIVIDENDS | (38.4 | ) | | — |
| | — |
| | — |
| | (38.4 | ) |
| NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS | $ | (787.7 | ) | | $ | (730.2 | ) | | $ | 241.9 |
| | $ | 488.3 |
| | $ | (787.7 | ) |
| OTHER COMPREHENSIVE INCOME | 266.2 |
| | 20.0 |
| | 176.4 |
| | (196.4 | ) | | 266.2 |
|
| TOTAL COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | (521.5 | ) | | $ | (710.2 | ) | | $ | 418.3 |
| | $ | 291.9 |
| | $ | (521.5 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statement of Cash Flows |
| For the Year Ended December 31, 2017 |
| (In Millions) |
| | Cleveland-Cliffs Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net cash provided (used) by operating activities | $ | (166.8 | ) | | $ | 430.4 |
| | $ | 74.5 |
| | $ | — |
| | $ | 338.1 |
|
| INVESTING ACTIVITIES | | | | | | | | | |
| Purchase of property, plant and equipment | (3.4 | ) | | (80.6 | ) | | (67.7 | ) | | — |
| | (151.7 | ) |
| Intercompany investing | 225.7 |
| | (7.4 | ) | | (45.0 | ) | | (173.3 | ) | | — |
|
| Other investing activities | (7.7 | ) | | 3.4 |
| | — |
| | — |
| | (4.3 | ) |
| Net cash provided (used) in investing activities | 214.6 |
| | (84.6 | ) | | (112.7 | ) | | (173.3 | ) | | (156.0 | ) |
| FINANCING ACTIVITIES | | | | | | | | | |
| Net proceeds from issuance of common shares | 661.3 |
| | — |
| | — |
| | — |
| | 661.3 |
|
| Proceeds from issuance of debt | 1,771.5 |
| | — |
| | — |
| | — |
| | 1,771.5 |
|
| Debt issuance costs | (28.6 | ) | | — |
| | — |
| | — |
| | (28.6 | ) |
| Repurchase of debt | (1,720.7 | ) | | — |
| | — |
| | — |
| | (1,720.7 | ) |
| Acquisition of noncontrolling interest | (105.0 | ) | | — |
| | — |
| | — |
| | (105.0 | ) |
| Distributions of partnership equity | — |
| | (52.9 | ) | | — |
| | — |
| | (52.9 | ) |
| Intercompany financing | 45.0 |
| | (288.8 | ) | | 70.5 |
| | 173.3 |
| | — |
|
| Other financing activities | (5.8 | ) | | (4.5 | ) | | (16.4 | ) | | — |
| | (26.7 | ) |
| Net cash provided (used) by financing activities | 617.7 |
| | (346.2 | ) | | 54.1 |
| | 173.3 |
| | 498.9 |
|
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | — |
| | — |
| | 3.3 |
| | — |
| | 3.3 |
|
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 665.5 |
| | (0.4 | ) | | 19.2 |
| | — |
| | 684.3 |
|
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 283.4 |
| | 2.5 |
| | 37.5 |
| | — |
| | 323.4 |
|
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 948.9 |
| | $ | 2.1 |
| | $ | 56.7 |
| | $ | — |
| | $ | 1,007.7 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statement of Cash Flows |
| For the Year Ended December 31, 2016 |
| (In Millions) |
| | Cleveland-Cliffs Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net cash provided (used) by operating activities | $ | (275.7 | ) | | $ | 462.9 |
| | $ | 115.8 |
| | $ | — |
| | $ | 303.0 |
|
| INVESTING ACTIVITIES | | | | | | | | | |
| Purchase of property, plant and equipment | (6.2 | ) | | (60.0 | ) | | (2.9 | ) | | — |
| | (69.1 | ) |
| Intercompany investing | 356.6 |
| | (3.3 | ) | | (117.0 | ) | | (236.3 | ) | | — |
|
| Other investing activities | 0.4 |
| | 10.8 |
| | — |
| | — |
| | 11.2 |
|
| Net cash provided (used) by investing activities | 350.8 |
| | (52.5 | ) | | (119.9 | ) | | (236.3 | ) | | (57.9 | ) |
| FINANCING ACTIVITIES | | | | | | | | | |
| Net proceeds from issuance of common shares | 287.4 |
| | — |
| | — |
| | — |
| | 287.4 |
|
| Debt issuance costs | (5.2 | ) | | — |
| | — |
| | — |
| | (5.2 | ) |
| Borrowings under credit facilities | 105.0 |
| | — |
| | — |
| | — |
| | 105.0 |
|
| Repayments under credit facilities | (105.0 | ) | | — |
| | — |
| | — |
| | (105.0 | ) |
| Repayments on equipment loans | (95.6 | ) | | — |
| | — |
| | — |
| | (95.6 | ) |
| Repurchase of debt | (305.4 | ) | | — |
| | — |
| | — |
| | (305.4 | ) |
| Distributions of partnership equity | — |
| | (59.9 | ) | | — |
| | — |
| | (59.9 | ) |
| Intercompany financing | 117.0 |
| | (339.9 | ) | | (13.4 | ) | | 236.3 |
| | — |
|
| Other financing activities | (0.6 | ) | | (9.9 | ) | | (17.2 | ) | | — |
| | (27.7 | ) |
| Net cash used by financing activities | (2.4 | ) | | (409.7 | ) | | (30.6 | ) | | 236.3 |
| | (206.4 | ) |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | — |
| | — |
| | (0.5 | ) | | — |
| | (0.5 | ) |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 72.7 |
| | 0.7 |
| | (35.2 | ) | | — |
| | 38.2 |
|
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 210.7 |
| | 1.8 |
| | 72.7 |
| | — |
| | 285.2 |
|
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 283.4 |
| | $ | 2.5 |
| | $ | 37.5 |
| | $ | — |
| | $ | 323.4 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statement of Cash Flows |
| For the Year Ended December 31, 2015 |
| (In Millions) |
| | Cleveland-Cliffs Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net cash provided (used) by operating activities | $ | 65.6 |
| | $ | (23.7 | ) | | $ | (4.0 | ) | | $ | — |
| | $ | 37.9 |
|
| INVESTING ACTIVITIES | | | | | | | | | |
| Purchase of property, plant and equipment | (6.9 | ) | | (68.2 | ) | | (5.7 | ) | | — |
| | (80.8 | ) |
| Intercompany investments | (205.8 | ) | | (2.9 | ) | | (80.0 | ) | | 288.7 |
| | — |
|
| Other investing activities | — |
| | (27.6 | ) | | 5.2 |
| | — |
| | (22.4 | ) |
| Net cash used by investing activities | (212.7 | ) | | (98.7 | ) | | (80.5 | ) | | 288.7 |
| | (103.2 | ) |
| FINANCING ACTIVITIES | | | | | | | | | |
| Proceeds from issuance of debt | 503.5 |
| | — |
| | — |
| | — |
| | 503.5 |
|
| Debt issuance costs | (33.6 | ) | | — |
| | — |
| | — |
| | (33.6 | ) |
| Borrowings under credit facilities | 296.8 |
| | — |
| | 13.0 |
| | — |
| | 309.8 |
|
| Repayments on credit facilities | (296.8 | ) | | — |
| | (13.0 | ) | | — |
| | (309.8 | ) |
| Repayments on equipment loans | (43.6 | ) | | — |
| | (1.8 | ) | | — |
| | (45.4 | ) |
| Repurchase of debt | (225.9 | ) | | — |
| | — |
| | — |
| | (225.9 | ) |
| Distributions of partnership equity | — |
| | (40.6 | ) | | — |
| | — |
| | (40.6 | ) |
| Preferred stock dividends | (51.2 | ) | | — |
| | — |
| | — |
| | (51.2 | ) |
| Intercompany financing | 80.0 |
| | 188.5 |
| | 20.2 |
| | (288.7 | ) | | — |
|
| Other financing activities | (5.0 | ) | | (25.0 | ) | | (15.8 | ) | | — |
| | (45.8 | ) |
| Net cash provided by financing activities | 224.2 |
| | 122.9 |
| | 2.6 |
| | (288.7 | ) | | 61.0 |
|
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | — |
| | — |
| | (1.4 | ) | | — |
| | (1.4 | ) |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 77.1 |
| | 0.5 |
| | (83.3 | ) | | — |
| | (5.7 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 133.6 |
| | 1.3 |
| | 156.0 |
| | — |
| | 290.9 |
|
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 210.7 |
| | $ | 1.8 |
| | $ | 72.7 |
| | $ | — |
| | $ | 285.2 |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and StockholdersShareholders of
Cleveland-Cliffs Inc.
Opinion on the Financial Statements
We have audited the accompanying statements of consolidated financial position of Cleveland-Cliffs Inc. (formerly Cliffs Natural Resources Inc.) and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related statements of consolidated operations, comprehensive income (loss), cash flows, and changes in equity, for each of the three years in the period ended December 31, 2017, and the related notes and the financial schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
February 14, 2018
We have served as the Company's auditor since 2004.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Cleveland-Cliffs Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Cliffs Natural ResourcesCleveland-Cliffs Inc. and subsidiaries (the “Company”"Company") as of December 31, 2014,2017, based on criteria established in Internal Control - Integrated Framework (2013) (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2017, of the Company and our report dated February 14, 2018, expressed an unqualified opinion on those financial statements and financial statement schedule.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2014 of the Company and our report dated February 25, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding a change in accounting for discontinued operations.
/s/ Deloitte DELOITTE & ToucheTOUCHE LLP
Cleveland, Ohio
February 25, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cliffs Natural Resources Inc.
Cleveland, Ohio
We have audited the accompanying statements of consolidated financial position of Cliffs Natural Resources Inc. and subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related statements of consolidated operations, comprehensive income (loss), cash flows, and changes in equity for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Cliffs Natural Resources Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for discontinued operations in 2014 due to the adoption of Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
February 25, 201514, 2018
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| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
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| Item 9A. | Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based solely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our President and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined under Rule 13a-15(f) promulgated under the Exchange Act.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with appropriate authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the Company's internal control over financial reporting as of December 31, 20142017 using the framework specified in Internal Control - Integrated Framework (2013), published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such assessment, management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2014.2017.
The effectiveness of the Company's internal control over financial reporting as of December 31, 20142017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report that appears herein.
February 25, 201514, 2018
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting or in other factors that occurred during our last fiscal quarter or our last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| Item 9B. | Other Information |
None.
